(Agamata Relevant Costing) Chap 9 - Short-Term Decision.pdf

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MULTIPLE CHOICE Basic concepts 1. The term relevant cost applies to all of the following decision situations except the A. Acceptance of special product order. B. Determination of product price. C. Manufacture of purchase of a component part. D. Replacement of equipment. (rpcpa) 1. B ? When is the term relevant cost not applicable.  The term “relevant cost” refers to those costs and expenses that are used in making a decision. A cost which is not considered in making a decision is an irrelevant cost. A cost may be relevant in one decision but may be irrelevant in another. There are relevant costs used in deciding on whether to accept or reject a special order, determining a product price, manufacturing or buying a component part, and replacing or retaining old equipment. There are relevant costs in every decision made. The best answer among the choices given is letter ”b”, although there are still relevant costs in deciding on what is the best selling price for the business. 2. The relevance of a particular cost to a decision is determined by the A. Size of the cost. B. Riskiness of the decision. C. Potential effect(s) on the decision. D. Accuracy and verifiability of the cost.

(cma)

2 C ? The attribute that makes a cost relevant in a decision.  A cost is relevant when used in making a decision. And a cost is used in decisionmaking when it differs from one option to another, and when it deals with the future. Therefore, the relevance of cost is determined by its potential effect(s) on the decision. A cost may be relevant in one decision but is irrelevant in another. Choice-letter “a” is incorrect because the size or amount of a cost does not measure relevance in decision making but the effects of such cost regardless of size is relevant. Choice-letter “b” is also incorrect because cost does not reflect the risk associated with a decision but is more determined by the circumstances besetting the environment of a certain decision made. Choice-letter “d” is incorrect because even if such cost is accurate and verifiable but is not used in decisionmaking, the same shall be irrelevant and not used in the decision. 3. Relevant or differential cost analysis A. Takes all variable and fixed cost into account to analyze decision alternatives. B. Considers only variable cost as they change with each decision alternative. C. Considers the change in reported net income for each alternative to arrive at the optimum decision for the company. D. Considers all variable and fixed cost as they change with each decision alternative (cma)

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3. D ? Those considered as relevant or differential cost.  Choice-letter “a is correct because differential costs are those that change with each decision alternative. Choice-letter “b” is incorrect because not only variable cost changes but fixed costs changes as well. Choice-letter “c” is not acceptable because a change in cost although has an effect or change in net income may not necessarily always refer to optimum change in net income. 4. Which one of the following is most relevant to a manufacturing equipmentreplacement decision? A. Original cost of the old equipment. B. Disposal price of the old equipment. C. Gain or loss on the disposal of the old equipment. D. A lump-sum write-off amount from the disposal of the old equipment. (cma) 4. B ? Among the given, the most relevant to a manufacturing equipment-replacement decision.  In a manufacturing equipment-replacement decision, relevant costs include those that have direct cash flows, savings, and related transactional tax effects. Choiceletter “b” is correct because the disposal price of the old equipment is an inflow and reduces the net cash needed to replace the equipment. Choice-letter “a” is incorrect because the original cost of the old equipment is a sunk cost and can no longer change. Choice-letter “c” is incorrect because gain or loss does not have a direct impact on cash flows. However, tax effects of gains or losses are relevant and included in this decision. Choice-letter “d” is definitely incorrect because a write-off entails a sunk cost that is perceived to be irrelevant and is expunged from the record; write-off costs are sunk costs, past costs, and do not change from an alternative to another and are always irrelevant. 5. Total unit costs are A. Relevant for cost-volume-profit analysis. B. Irrelevant in marginal analysis. C. Independent of the cost system used to generate them. D. Needed for determining product contribution.

(cma)

5. B ? Description of total unit cost.  Choice-letter “a” is incorrect because what is relevant in cost-volume-profit analysis is the segregated amount of fixed cost and variable cost and not the total unit cost. This makes choice-letter “b” correct. Choice-letter “c” is incorrect because unit costs are dependent on the cost system used to generate them such as job order costing, process costing, activitybased costing, prime costing, life cycle costing, and others. The concept and process applied in a costing method have direct bearings on the computed unit costs.

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6. In a manufacturing environment, the best short-term profit-maximizing approach is to A. Maximize unit gross profit times the number the units sold. B. Minimize variable costs per unit times the number of units produced. C. Minimize fixed overhead cost per unit produced at full capacity. D. Maximize contribution per unit times the number of units sold. (cma) 6. D ? The best short-term profit maximizing approach.  The better way to predict profit is by using the marginal costing approach. In this approach, profit is determined as contribution margin less fixed costs and expenses. This means that a peso increase in contribution margin is a peso increase in profit. Considering that fixed costs are constant, to maximize profit means maximizing contribution margin per total and per unit. Make or buy 7. Among the costs relevant to a make-or-buy decision, include variable manufacturing costs as well as A. Unavoidable costs. C. Avoidable fixed cost. B. Plant depreciation. D. Real estate taxes. (rpcpa) 7. C ? The choice that is also included as a relevant cost in the make-or-buy decision.  Relevant costs include those that change from one alternative to another (differential costs) and those that pertain to the future (future costs). The following relevant costs are considered in the make-or-buy decisions:  Variable costs of production  Variable costs of administration and selling  Avoidable fixed costs and expenses  Opportunity costs such as:  Possible rental income when production facilities are released, deduct from the cost to buy.  Possible contribution margin from the production of new product(s) when facilities are released, deduct from the cost to buy.  Savings in the overall production costs if a part is not produced and instead is bought from an outside supplier, deduct from the cost to buy.  Lost contribution margin from regular sales due to the acceptance of the special sales order, add to the cost to buy. Choices “a”, “b”, and “d” are incorrect because all of them are unavoidable fixed costs. 8. In determining whether to manufacture a part or buy it from an outside vendor, a cost that is irrelevant to the short-run decision is A. Direct labor. B. Variable overhead.

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Fixed overhead that will be avoided if the part is bought from an outside vendor. Fixed overhead that will continue even if the part is bought from an outside vendor. (aicpa)

8. D ? A cost that is irrelevant in short-term decision.  Irrelevant costs are past cost and do not change from alternative to another. Choice-letter “d” is correct because fixed overhead is constant, will continue regardless of decision made, it is therefore irrelevant. Choice-letters “a”, “b”. and “c” are relevant costs because they are differential costs and change from alternative to another. 9. What is the opportunity cost of making a component part in factory given no alternative use of the capacity? A. The total manufacturing cost of the component. B. Zero. C. The fixed manufacturing cost of the component. D. The variable manufacturing cost of the component. (rpcpa) 9. B ? The opportunity cost of making a component part in a factory given no alternative use of the factory.  If there is no alternative, there is no opportunity costs. Opportunity costs occur only if there are at least two alternatives where a decision must be drawn. The benefit of the alternative not taken (or sacrificed) will be the opportunity costs of the alternative followed. 10. Cost relevant to an insourcing vs. outsourcing decision include variable manufacturing costs as well as A. Avoidable fixed costs. C. Property taxes. B. Factory depreciation. D. Factory management costs. (cma) 10. A ? Among the given, identify the relevant cost in insourcing vs. outsourcing decision.  Insourcing means making and outsourcing is buying. Choice-letter “a” is correct because avoidable fixed costs are relevant cost of making. Choice-letters “b”, “c”, and “d” are incorrect because they are all unavoidable fixed costs and are irrelevant in the decision to make or buy a part. 11. A company’s approach to an insourcing vs. outsourcing decision. A. Depends on whether the company is operating at or below normal volume. B. Involves an analysis of avoidable costs. C. Should use absorption (full) costing. D. Should use activity-based costing. (cma) 11. B ? A statement with regard to insourcing vs. outsourcing decision.

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 Choice-letter “b” is correct because make or buy decision involves an analysis of avoidable costs, including that of fixed costs. Choice-letter “a” is incorrect because normal volume has not relevance in the make or buy decision. Choice-letters “c” and “d” are incorrect because the relevance of a cost does not depend on the cost system used to generate it, whether absorption costing, variable costing, activitybased costing, and others. 12. What is the opportunity cost of making a component part in a factory given no alternative use of the capacity? A. The variable manufacturing cost of the component. B. The total manufacturing cost of the component. C. The total variable cost of the component. D. Zero. (cma) 12. D ? Determine the opportunity cost.  Opportunity cost is the benefit sacrificed in favor of the decision made. They are not recorded on the financial books and are theoretical in nature. The alternatives for the decisions are to make or buy a part. Making the part would make use of the released facilities while buying the part from an outside supplier would make the released facilities idle. Since the idle facilities have no alternative use, therefore, there is no benefit foregone or sacrificed. Choice-letters “a”, “b”, and “c” are incorrect because they are all sunk costs, already recorded, irrelevant, and are not opportunity costs. 13. Plainfield Company manufactures part G for use in its production cycle. The cost per unit for 10,000 units of part G are as follows: Direct materials P 3 Direct labor 15 Variable overhead 6 Fixed overhead 8 Total P 32 Verona Company has offered to sell Plainfield 10,000 units of part G for P30 per unit. If Plainfield accepts Verona’ offer, the released facilities could be used to save P45,000 in relevant costs in the manufacture of part H. In addition, P5 per unit of the fixed overhead applied to part G would be totally eliminated. What alternative is more desirable and by what amount is it more desirable? Alternative Amount A. Manufacture P10,000 B. Manufacture P15,000 C. Buy P35,000 D. Buy P65,000 (aicpa) 13. C ? What alternative, make or buy, is more desirable and by what amount?  An excellent way of determining which alternative is more desirable is by comparing each alternatives relevant costs. The total unit variable production costs is P24 (i.e., P3 + P15 + P6). Fixed costs are generally invariable and are

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constant, except for avoidable fixed costs and expenses which change from an alternative to another and is therefore relevant. An analysis of the relevant costs of the alternatives, make or buy, is shown as follows: Make Buy Purchase price (10,000 units x P30) P300,000 Variable production costs (10,000 x P24) P240,000 Avoidable fixed overhead (10,000 x P5) 50,000 Savings from released facilities ( 45,000) Net relevant costs P290,000 P255,000 Savings (P290,000 – P255,000) P 35,000 14. Great Electronics is operating at 70% capacity. The plant manager is considering making component 501 now being purchased for P110 each, a price that is projected to increase in the near future. The plant has the equipment and labor force required to manufacture the component. The design engineer estimates that each component requires P40 of direct materials and P30 of direct labor. The plant overhead is 200% of direct labor peso cost, and 40% of the overhead is fixed cost. a decision to manufacture component 501 will result in a gain or (loss) for each component of A. P28 C. P(20) B. P16 D. P4 (rpcpa) 14. D ? The gain(loss) for each component if component 501 is manufactured by the company.  It is a case of make or buy decision. The alternative that gives the lower relevant cost will be selected. A relevant costs analysis is shown below:

Purchase price Direct materials Direct labor Variable overhead (P30 x 200% x 60%) Unit relevant costs Advantage of making, per unit (P110 – P106)

Cost to make P 40.00 30.00 36.00 P106.00

Cost to buy P110.00

______ P110.00 P4.00

15. Efren Corporation uses Part BIX in the assembly of a major product line. The cost to produce one BIX is presented below: Direct materials P 4,000 Material handling (20% of direct materials) 800 Direct labor 32,000 Overhead 48,000 Total manufacturing costs P84,800 Materials handling which is not included in manufacturing overhead represents the direct variable costs of the receiving department that are applied to direct materials and purchased component on the basis of their cost. The company’s annual overhead budget is one-third variable and two-thirds fixed. Ten units of BIX are

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expected to be required for one month. Zim Company offers to supply BIX at a unit price of P60,000. If product BIX is purchased from Zim, the released facilities would be used to produce product CZX and generate a profit of P208,000. A. P208,000 C. P512,000 B. P302,000 D. P 16,000 (fta) 15. D ? The net opportunity cost of the better alternative, make or buy.  Whichever alternative that would give a lower relevant costs would be the better choice in the short-run analysis of maximizing profit. The relevant cost analysis is presented below: Cost to MAKE Cost to BUY Purchase price P -P 60,000 Direct materials 4,000 Materials handling (20% x P4,000) 800 (20% x P60,000) 12,000 Direct labor 32,000 Variable overhead (P48,000 x 1/3) 16,000 Profit from product CZX if the part is purchased (P208,000/10) ________ (20,800) Unit relevant costs P 52,800 P 51,200 x No. of units needed 10 units 10 units Total relevant costs P528,000 P512,000 Less: Costs to buy 512,000 Net opportunity costs of making the parts P 16,000

16. Syanton manufactures a particular computer component. Manufacturing cost per units are as follows: Direct materials P 50 Direct labor 500 Variable overhead 250 Fixed overhead 400 Total manufacturing costs P1,200 Fredix, Inc. has contracted Syanton with an offer to sell 10,000 of the component for P1,100 per unit. If Syanton accepts the proposals, P2,500,000 of the fixed overhead will be eliminated. Should Syanton make or buy the component and why? A. Buy due to savings of P1,000,000. B. Make due to savings of P500,000. C. Buy due to savings of P2,500,000. D. Make due to savings of P3,000,000. (rpcpa) 16. D ? Should Syanton make or buy a component part?  The total unit variable costs of production (which includes direct materials, direct labor, and variable overhead) is P800 (P50 + P500 + P250). Below is the relevant costs analysis:

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Make Purchase costs (10,000 x P1,100) Variable mfg. Costs (10,000 x P800) Avoidable fixed overhead Total relevant costs Less: Cost to make Net advantage of making

P 8,000,000 2,500,000 P10,500,000

Buy P11,000,000

11,000,000 10,500,000 P 500,000

17. The Blade Division of Dan Corporation produces hardened steel blades. One-third of the Blade Division’s output is sold to the Lawn Products Division of Dana, the remainder is sold to outside customers. The Blade Division’s estimated sales and standard cost data for the fiscal year ending June 30, 2006, are as follows: Lawn Products Outsiders Sales P15,000 P40,000 Variable costs (10,000) (20,000) Fixed costs ( 3,000) ( 6,000) Gross margin P 2,000 P14,000 Unit sales 10,000 20,000 The Lawn Products Division has an opportunity to purchase 10,000 identical quality blades from an outside supplier at a cost of P1.25 per unit on a continuing basis. Assume that the Blade Division cannot sell any additional products to outside customers. Should Dana allow its Lawn Products Division to purchase the blades from the outside supplier, and why? A. Yes, because buying the blades would save Dana Company P500. B. No, because making the blades would save Dana Company P1,500. C. Yes, because buying the blades would save Dana Company P2,500. D. No, because making the blades would save Dana Company P2,500. (aicpa) 17. D ? Should Dan allow its Lawn Products Division to purchase the blades from the outside supplier and why?  The unit variable cost to make is P1.00 (i.e., P10,000 / 10,000 units). The outside supplier is offering to sell at P1.25. It would be advantages not to allow Lawn Products Division to buy blades from an outside supplier and save P2,500, as follows: Relevant cost to make (10,000 units x P1.00) P10,000 - Relevant cost to buy (10,000 x P1.25) 12,500 Advantage of making the blades P 2,500 18. The following standard costs pertain to a component part manufactured by Atoy Company: Direct materials P 2 Direct labor 5 Factory overhead 20 Standard cost per unit P 27 Factory overhead is applied at P1 per standard machine hour. Fixed capacity cost is 60% of applied factory overhead, and is not affected by any “make or buy”

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decision. It would cost P25 per unit to buy the part from an outside supplier. In the decision to “make or buy”, what is the total relevant unit manufacturing cost to be considered? A. P 2 C. P18 B. P15 D. P27 (aicpa) 18. B ? Total relevant cost of manufacturing.  In make or buy decisions, the relevant costs of manufacturing includes variable production costs, avoidable fixed costs, and all other incremental cost of manufacturing. Given the data in this problem, the relevant cost of manufacturing is P15 computed as follows: Direct materials P2 Direct labor 5 Variable overhead (P20 x 40%) 8 Relevant manufacturing unit cost P15 19. Red Nose Company makes hoses for its sprayers. Unit costs applicable to these hoses are: Direct materials P35.00 Direct labor 20.00 General and Administrative cost 16.00 Fixed manufacturing overhead 21.00 Variable manufacturing overhead 9.00 Five thousand units (5,000) are required for the year. The space that is used for the hoses production can be used as warehouse and will save rental cost of P48,000 per year. The hoses can be bought for P70.00 a piece. Should Red Nose Co. buy or make the hoses? Why? A. Buy because there will be savings of P3.60 per hose. B. Make, there will be a savings of P6.00 per hose C. Make, because there will be savings of P31.00 per hose D. Buy, because there will be savings of P31.00 per hose (rpcpa) 19. A ? Should the company make or buy the hoses?  In the short-term profit analysis, whichever alternative that gives a lower total relevant cost will be chosen to generate savings and increase the income of the business. The relevant costs analysis is shown below: Cost to make Cost to buy Unit purchase price P P 70.00 Unit direct materials 35.00 Unit direct labor cost 20.00 Unit variable manufacturing overhead 9.00 Savings in rental (P48,000/5,000) ________ ( 9.60) Net relevant costs P 64.00 P 60.40 Less: Cost to buy 60.40 Net advantage of buying per unit P 3.60

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The company should buy the hoses and save an amount of P3.60 per hose or a total savings of P18,000 ( i.e., 5,000 x P3.60). The fixed manufacturing overhead is not expected to change between the alternatives and is considered irrelevant in the analysis. Avoidable fixed overhead is, however, to be included in the make-orbuy costs analysis. The general and administrative cost, since the problem is silent, is considered as fixed and is also an irrelevant cost. 20. The Blue Plate Company is operating at 50% capacity producing 100,000 units ceramic plates a year. With the economic boom that the country is expected to have in the coming year, the company plans to utilize 75% of capacity. Part of the manufacturing process is hand-painting which has a variable cost of material at P4.50 and labor at P5.50 per plate. This painting process has variable overhead at P1.00 which is 40% of total variable factory overhead. Total factory overhead is set at P500 per 100 plates. No increase in fixed factory overhead is expected even with the substantial increase in production. An offer to sub-contract the incremental hand painting job was a given at P10.50 per plate but the company will have to lease an equipment at P10,000 annual rental. The plates sell for P50.00 a piece at the contribution margin rate of 45%. Should Blue Plate Company sub-contract? Why? A. No because the company will lose P135,000. B. Yes, because the company will save P165,000. C. Yes, because the company will earn P15,000 more. D. No, because there is no benefit for the company. (rpcpa) 20. C ? Should the company sub-contract the additional units to be produced?  The company is presently operating at 50% capacity producing 100,000 units. It wants to increase its production to 75%. One of the production processes in producing the product may be sub-contracted at P10.50 per unit. The company should rent an equipment for P10,000 if the process is sub-contracted. The costs and short-term profit analyses are as follows: a. Production at 75% capacity (100,000/50% x 75%) 150,000 units Less: Present production at 50% capacity 100,000 units Incremental units to be produced 50,000 units b. Relevant costs analysis:

Materials (50,000 x P4.50) Labor (50,000 x P5.50) Variable overhead (50,000 x P1.00) Sub-contract price (50,000 x P10.50) Equipment rental Total relevant costs Less: Relevant costs to sub-contract Savings from sub-contracting

Cost to make P225,000 275,000 50,000 _______ 550,000 535,000 P 15,000

Cost to subcontract

P 525,000 10,000 P 535,000

The company should sub-contract the additional 50,000 units and earn a savings of P15,000.

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21. Part BX is a component that Motors & Engines Company uses in the assembly of motors. The cost to produce one BX is presented below: Direct materials P 4,000 Materials handling (20% of direct materials) 800 Direct labor 32,000 Overhead (150% of direct labor) 48,000 Total manufacturing costs P84,400 Materials handling which is not included in manufacturing overhead, represents the direct variable costs of the receiving department that are applied to direct materials and purchased components on the basis of their cost. The company’s annual overhead budget is one-third variable, and two-thirds fixed. Motors and Engines Company offers to supply BX at a unit price of P60,000. Should the company buy or manufacture part BX? A. Buy, due to advantage of P24,800 per unit. B. Manufacture, due to advantage of P7,200. C. Buy, due to advantage of P12,800 per unit. D. Manufacture, due to advantage of P19,200 per unit. (rpcpa) 21. C ? Should the company buy or make part BX?  Below is the relevant costs analyses: Make Purchase price Direct Materials Materials handling (20% x P4,000) (20% x P20,000) Direct Labor Variable overhead (1/3 x P48,000) Total relevant costs Less: Relevant costs to make Net advantage of making

P

Buy P 60,000

4,000 800 12,000

32,000 16,000 P 52,800

________ P 72,000 52,800 P 19,200

The fixed overhead is irrelevant in the analysis because it remains to be incurred regardless of decision to be made. Materials handling cost is also incurred if the parts are purchased. 22. Essence Producers, Inc., manufactures various scents out of Philippine flowers and plants. It also manufactures exotic oils that it subsequently uses in the scents production. The cost per unit of measure for 15,000 units of exotic oils are as follows: Direct materials P 20 Direct labor 34 Variable factory overhead 24 Unavoidable fixed factory overhead 32 Total P110

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Xtra Oils, Inc. offered Essence to supply 15,000 units of measure of the exotic oil for P1,260,000. Assuming the facilities for exotic oils have no alternative use, Essence Producers, Inc., should A. Continue to produce exotic oils at P1,170,000 relevant costs against purchase cost of P1,260,000. B. Produce 7,500 units and buy 7,500 units from Xtra Oils to save P300,000. C. Buy from Xtra Oils, Inc. at P1,260,000 against cost to produce of P1,650,000 or savings of P390,000. D. Produce 7,500 units and buy 7,500 units from Xtra Oil save P240,000. (rpcpa) 22. A ? A decision to make or buy a product.  To decide whether to make or buy a part, the net relevant costs of making and buying should be tabulated and compared. The alternative that results to lower relevant costs would be the better alternative. In this case, the relevant cost analysis, shall be: Relevant costs of making (15,000 x P78) P1,170,000 Relevant costs of buying 1,260,000 Net advantage of making P 90,000 23. Union Company manufactures plugs used in its electrical gadgets at a cost of P108 per unit that includes P24 of fixed overhead. It needs 30,000 of these plugs yearly, and Divisive Corp. offers to sell these items to Union at P99 per unit. If Union decides to purchase the plugs, P180,000 of the annual fixed overhead applied will be eliminated, and the company may be able to rent the facility previously used for manufacturing the plugs. If Union purchases the plugs but does not rent the unused facility, the company would A. Save P6.00 per unit. C. Save P9.00 per unit B. Lose P18.00 per unit. D. Lose P9.00 per unit. (rpcpa) C. 23. D ? Effect on company’s profit if the company purchases the plugs but does not rent the unused facility.  If Union Company purchases the plugs but does not able to rent out the unused facility, it will result to net disadvantage of P9 per unit, computed as follows: Make Buy Unit purchase price P 99 Unit variable production cost (108 – P24) P 84 Avoidable fixed overhead P180,000 / 30,000 units) 6 Net relevant unit costs P 90 P 99 Net advantage P 9 The company would be loosing P9 per unit if it buys the plugs and does not able to rent out the unused facility. 24. Maeburg Inc. has excess production capacity. At times, it buys the same product form third party. Below are pertinent information:

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P70.00 20.00 35.00

The most it should pay for buying this product it currently makes would be the A. Selling price of P70. B. Total variable cost of producing the product of P35.00 per unit. C. Total variable cost per unit of P35.00 plus the reduced fixed cost per unit after accounting for the effects of the added volume. D. Total cost of production or P55.00 per unit. (rpcpa) 24. B ? The most (maximum amount) that a company should pay for buying a product that it currently makes.  The maximum amount that a company should pay for a product that it also makes currently should at least equal to incremental cost plus opportunity cost attendant to making the product. Since the company has an excess production capacity, and there is no opportunity cost of using the said excess capacity, the maximum amount that the company should be willing to pay an outside supplier for a product that it currently makes should not exceed its variable cost of production which amounts to P35, hence, choice-letter “b” is correct. Choice-letter “a” is incorrect because buying the product at P70 per unit would entail an additional cost of P35 (i.e., P70 - P35) and would be definitely unfavorable on the part of the company. Choice-letter “c” is incorrect because fixed costs are assumed to be unchanged from one level of production to another. And if ever fixed costs are reduced on account of the increased production level, which is highly irregular, the reduction or savings from fixed costs should be treated as deduction in arriving at the maximum amount to be paid to supplier. Choice-letter “d” is also incorrect because the total cost of production includes fixed costs and are considered irrelevant, it does not change, and does not affect the decisions. 25. Picnic Items, Inc. manufactures coolers of 10,000 units that contain a freezable ice bag. For an annual volume of 10,000 units, fixed manufacturing costs of P500,000 are incurred. Variable costs per unit are: Direct materials P80 Direct labor 15 Variable overhead 20 Bags Corp. offered to supply the assembled ice bag for P40 with a minimum order of 5,000 units. If Picnic accepts the offer, it will be able to reduce variable labor and overhead by 50%. The direct materials for the freezable bag will cost Picnic P20 if it will produce it. Considering Bags Corp. offer, Picnic should A. Buy the freezable ice bag due to P150,000 advantage. B. Produce the freezable ice bag due to P225,000 advantage. C. Produce the freezable ice bag due to P50,000 advantage. D. Buy the freezable ice bag due to P50,000 advantage. (rpcpa) 25. A

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? A decision on whether to produce or buy the ice bag.  The decision shall be based on the relevant cost analysis as follows: Make Buy Purchase price (10,000 x P40) P400,000 Direct materials (10,000 x P20) P200,000 Direct labor (10,000 x P15) 150,000 Variable overhead (10,000 x P20) 200,000 Relevant costs P550,000 P400,000 Savings in buying (P550,000 – P400,000) P150,000 It is more advantageous for the business to buy the ice bags and save P150,000 in the process. 26. The Reno Company manufactures part no. 498 for use in its production line. The manufacturing costs per unit for 20,000 units of part no. 498 are as follows; Direct materials P 6 Direct labor 30 Variable overhead 12 Fixed overhead allocated 16 Total P 64 The Tray Corporation has offered to sell 20,000 units of part no. 498 to Reno for P60 per unit. Reno will make the decision to buy the part from Tray if there is an overall savings of P25,000 for Reno. If Reno accepts Tray’s offer, P9 per unit of the fixed overhead allocated would be totally eliminated. Furthermore, Reno has determined that the released facilities could be used to save relevant costs in the manufacture of part no. 575. For Reno to have an overall saving of P25,000, the amount of relevant costs that would have to be saved by using the released facilities in the manufacture of part no. 498 would have to be A. P 80,000 C. P125,000 B. P 85,000 D. P140,000 (aicpa) 26. B ? Amount to be saved by using the released facilities in the manufacture of a part.  The unit variable cost is P48, and the avoidable fixed overhead is P9 per unit. A net savings in the amount of P25,000 is a condition before Reno buys the parts from Tray, an outside suppler. The required savings from released facilities is determined as follows: Make Buy Purchase price (20,000 x P60) P1,200,000 Variable production costs (20,000 x P48) P 960,000 Avoidable fixed overhead (20,000 x P9) 180,000 Net savings from buying (25,000) Totals P1,140,000 P1,115,000 Savings from released facilities (P1,140,000 – P1,115,000) P 85,000

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27. The ABC Company manufactures components for use in producing one of its finished products. When 12,000 units are produced, the full cost per unit is P35, separated as follows: Direct materials P 5 Direct Labor 15 Variable overhead 10 Fixed overhead 5 The XYZ Company has offered to sell 12,000 components to ABC for P37 each. If ABC accepts the offer, some of the facilities currently being used to manufacture the components can be rented as warehouse space for P40,000. However, P3 of the fixed overhead currently applied to each component would have to be covered by ABC’s other products. What is the differential cost to the ABC Company of purchasing the components from the XYZ Company? A. P 8,000 C. P24,000 B. P20,000 D. P44,000 (cia) 27. B ? The differential cost of purchasing the component.  The unit variable cost is P30. The avoidable fixed overhead is P2 (i.e., P 5 – P3). The relevant costs of making and buying are as follows: Make Buy Purchase price (12,000 x P37) P444,000 Variable production costs (12,000 x P30) P360,000 Avoidable fixed overhead (12,000 x P2) 24,000 Rental income ( 40,000) Net relevant costs P384,000 P404,000 Savings (P404,000 – P384,000) P 20,000 The differential cost, as used here, refers to the difference in the net relevant costs of producing and purchasing the part. 28. Listed below are a company’s monthly unit costs to manufacture and market a particular product Manufacturing Cost: Direct materials P2.00 Direct Labor 2.40 Variable indirect 1.60 Fixed Indirect 1.00 Marketing costs: Variable 2.50 Fixed 1.50 The company must decide whether to continue making the product or buy it from an outside supplier. The supplier has offered to make the product at the same level of quality that the company can make it. Fixed marketing would be unaffected, but variable marketing costs would be reduced by 30% if the company were to accept the proposal. What is the maximum amount per unit that in the company can pay the supplier without decreasing its operating income?

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P8.50 P6.75

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C. P7.75 D. P5.25

390

(cma)

28. B ? The maximum amount per unit that a company should pay its supplier without decreasing its operating income.  The maximum amount per unit that should be paid to outside supplier should be the net unit cost of making the part. The net relevant cost of making is P6.75 computed as follows: Unit variable production costs (P2 + P2.40 + P1.60) P6.00 In increase in variable expense (P2.50 x 30%) 0.75 Net relevant cost of making P6.75 The company should not pay more than its cost of producing the part. Questions 29 and 30 are based on the following information. A business needs a computer application that can be either developed internally or purchased. Suitable software from a vendor costs P29,000. Minor modifications and testing can be conducted by the systems staff as part of their regular workload. If the software is developed internally, a systems analyst should be assigned full time, and a contactor would assume the analyst’s responsibilities. The hourly rate for the regular analyst is P25. The hourly rate for the contractor is P22. The contactor would occupy an empty office. The office has 100 square feet, and occupancy cost is P45 per square foot. Computer time is charged using predetermined rates. The organization has sufficient excess computer capacity for either software development or modification/testing of the purchased software. Other related data are as follows: Internal Purchased Development Software Systems analyst time in hours Development 1000 N/A Modifications and testing N/A 40 Computer charges P800 P250 Additional hardware purchased P3,200 N/A Incidental supplies P500 P200 29. When applying the cost-benefit approach to a decision, the primary criterion is how well management goals will be achieved in relation to costs. Costs include all expected A. Variable costs for the courses of action but not expected fixed costs because only the expected variable costs are relevant. B. Incremental out-of-pocket costs as well as all expected continuing costs that are common to all the alternative courses of action. C. Future costs that differ among the alternative courses of action plus all qualitative factors that cannot be measured in numerical terms. D. Historical and future costs relative to the courses of action including all qualitative factors that cannot be measured in numerical forms. (cia)

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29. C ? Costs used in cost-benefit approach.  Costs used in cost-benefit analysis are relevant costs. They include future costs that differ from the alternative courses of action, choice-letter “c” is correct. Choice-letter “a” is incorrect because fixed costs that relate to the future and may change between alternative courses of actions are also relevant. Choiceletter “b” is incorrect because costs that are common to all alternative courses of action do not differ and are irrelevant. Choice-letter “d” is definitely incorrect because historical costs are always irrelevant in decision making. They cannot be changed and therefore do not vary between alternatives. 30. Based solely on the cost figures presented, the cost of developing the computer application will be A. P3,500 less than acquiring the purchased software package. B. P500 less than acquiring the purchased software package. C. P1,550 more than acquiring the purchased software package. D. P3,550 more than acquiring the purchased software package. (cma) 30. A ? The cost of developing the computer application.  The choices given indicate the cost of internally developing the software that should be compared with the cost of purchasing it. The relevant costs of the alternatives are: Internal Development

Purchase price Systems development (1,000 hrs. x P22) Additional hardware Incidental supplies Net relevant costs Savings (P29,200 – P25,700)

Purchasing

P29,000 P22,000 3,200 500 P25,700 P 3,500

200 P29,200

The cost of systems modification and testing is an allocated cost from the regular workload of the system analyst, and is irrelevant. Computer charges are also allocated costs (or transfer costs) and do not require additional expenditures, given idle capacity. These costs are also irrelevant Questions 31 through 33 are based on the following information. Richardson Motors uses production of large diesel engines. The cost to manufacture one unit of T305 is presented below. Direct materials P 2,000 Materials handling (20% of direct material cost) 400 Direct Labor 16,000 Manufacturing overhead (150% of direct labor) 24,000 Total manufacturing cost P42,000 Materials handling, which is not included in manufacturing overhead, represents the direct variable costs of the receiving department that are applied to direct

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materials and purchased components on the basis of their cost. Richardson’s annual manufacturing overhead is one-third variable and two-thirds fixed. Simpson Castings, one of Richardson’s reliable vendors, has offered to supply T305 at a unit price of P30,000. 31. If Richardson Motors purchases the ten T305 units from Simpson Castings, the capacity Richardson used to manufacture these parts would be idle. Should Richardson decide to purchase the parts from Simpson, the out-of-pocket cost per unit of T305 would. A. Decrease P6,400. C. Increase P 9,600. B. Increase P 3,600. D. Decrease P4,400. (cma) 31. C ? The out-of-pocket cost per unit if Richardson purchases T305 part.  The out-of-pocket cost, as referred to in this problem, is the additional cost per unit incurred by the company if they purchased the part, computed as follows: Cost to Make Cost to buy Purchase price P30,000 Direct materials P 2,000 Materials handling 400 6,000 (20% x P30,000) Direct labor 16,000 Variable overhead (1/3 x P24,000) 8,000 . Net relevant costs P26,400 P36,000 Savings P 9,600 .

The company would pay P9,600 more per unit if it purchases the part. 32. Assume Richardson Motors is able to rent all idle capacity for P50,000 per month. If Richardson decides to purchase the 10 units from Simpson Castings, Richardson’s monthly cost for T305 would A. Increase P46,000. C. Increase P96,000. B. Decrease P64,000. D. Decrease P34,000. (cma) 32. A ? Effect on the monthly cost if the parts are purchased and the idle capacity is rented for P50,000 per month.  Analyzing the relevant cost of making and buying 10 units of T305 would result as follows: Cost to make Cost to buy Relevant costs before rental income (P26,400 x 10 units) P264,000 (P36,000 x 10 units) P360,000 Rental income ( 50,000) Net relevant costs P264,000 P310,000 Savings P 46,000 The company has decided to purchase the parts and shall therefore pay more by P46,000.

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33. Assume the rental opportunity does not exist and Richardson Motors could use the idle capacity to manufacture another product that would contribute P104,000 per month. If Richardson chooses to manufacture the ten T305 units in order to maintain quality control, Richardson’s opportunity cost is A. P68,000 C. P 8,000 B. P88,000. D. P(96,000) (cma) 33. C ? The opportunity cost if the company manufactures the parts.  :Again, the best way is to compare the costs of making and buying as follows: Cost of making Cost of buying Relevant costs before other items P264,000 P360,000 Contribution margin from another product if the parts are purchased ( 104,000) Net relevant costs P264,000 P256,000 Savings P 8,000 It would be advisable for the company to buy the parts. However, since the company decided to make the parts, it has to spend more. The savings of P8,000 that could have been derived had the company buys the part is the opportunity cost of the decision to make. Questions 34 and 35 are based on the following information. Regis Company manufactures plugs used in its manufacturing cycle at a cost of P36 per unit that includes P8 of fixed overhead. Regis needs 30,000 of these plugs annually, and Frodo Company has offered to sell these units to Regis at P33 per unit. If Regis decides to purchase the plugs, P60,000 of the annual fixed overhead applied will be eliminated, and the company may be able to rent the facility previously used for manufacturing the plugs. 34. If Regis Company purchases the plugs but does not rent the unused facility, the company would A. Save P3.00 per unit. C. Save P2.00 per unit. B. Lose P6.00 per unit. D. Lose P3.00 per unit. (cma) 34. D ? Effect of the company’s decision to purchase the part.  The relevant per unit cost of making and buying are as follows: Make Purchase price Variable production costs (P36 – P8) P 28 Avoidable fixed overhead (P60,000 / 30,000 units) Net relevant unit cost P 28 Savingsfrom making (P31 – P28) P 3

Buy P 33 ( 2) P 31

If the company decides to purchase the plugs, it has to spend more by P3 per unit, hence, a loss in the part of the company.

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35. If the plugs are purchased and the facility rented, Regis Company wishes to realize P100,000 in savings annually. To achieve this goal, the minimum annual rent on the facility must be A. P 10,000 C. P 70,000 B. P 40,000 D. P190,000 (cma) 35. D ? The minimum annual rental on the facility.  The minimum rental income shall be enough to product a net savings of P100,000. If the company purchases from outside supplier, it has to pay more by P3 per unit. The minimum rental income for the released facilities shall be P190,000, computed as follows: Increase in costs (30,000 units x P3) P 90,000 Desired savings 100,000 Minimum rental income P190,000 36. Pixie Company produces Components 6417 for use in one of its electronic gadgets. Normal annual production for the item is 100,000 units. The cost per 100unit lot of the part are as follows: Direct materials P 520 Direct labor 200 Manufacturing overhead: Variable 240 Fixed 320 Total manufacturing costs per 100 units P1,280 Bobbie Inc. has offered to sell Pixie all 100,000 units it will need during the coming year for P1,200 per 100 units. if Pixie accepts the offer from Bobbie, the facilities used to manufacture Component 6417 could be used in the production of Component 8275. This change would save Pixie P180,000 in relevant costs. in addition, a P200,000 cost item included in fixed overhead is specifically related to Part 6417 and would be eliminated. Pixie should A. Buy component 6417 because of P300,000 savings. B. Buy component 6417 because of P140,000 savings. C. Continue producing component 6417 because of P40,000 savings. D. Continue producing component 6417 because of P60,000 savings. (rpcpa) 36. B ? Make or buy component 6417.  In the short-term analysis of deciding whether to make or buy a component part, the alternative that gives a lower relevant costs should be chosen. The relevant cost analysis for a make of buy decision is presented below: Cost to make Cost to buy Purchase price (1,000 x P1,200) P1,200,000 Direct materials (1,000 x P250) P520,000 Direct labor (100,000 x P200) 200,000 Variable overhead (100,000 x P240) 240,000 Savings from buying (180,000) Avoidable fixed overhead 200,000 _________

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Total relevant costs Less: Cost of buying Net advantage of buying

1,160,000 1,020,000 P 140,000

P1,020,000

Component 6417 should be purchased to earn a savings of P140,000 per annum. The unavoidable (allocated) fixed costs is not considered in the analysis because it is not a relevant costs. Accept or reject a special sales order 37. Idle capacity in the interim (normally temporary) will generate short-term benefit in accepting sales at price that A. Positively motivate employees. B. Result in less than normal contribution margin. C. Increase total fixed costs. D. Reduce the overall operating income to sales ratio. (rpcpa) 37. B ? Effects of accepting a sales price given an idle capacity.  Choice-letter “b” is correct because optimizing an idle facility would normally result to a lower sales price and lower than the normal contribution margin. The shortterm goal is to maximize the use and potential of the company’s facility in relation to profit. Choice-letter “a” is incorrect because pricing a particular production at a price lower than the normal amount would send a negative signal to employees. Choiceletter “c” is incorrect because using an idle facility does not increase total fixed costs. Choice-letter “d” may be correct because increasing the amount of sales and producing an incremental profit at a rate lower than normal would result to a lower income to sales ratio but is not the correct choice because the premise of the choice relates to short-term benefit. A reduction in the ratio of income to sales does not measure short-term benefit. 38. In considering a special order situation that will enable a company to make use of presently idle capacity, which of the following costs would be irrelevant? A. Depreciation. C. Materials. B. Variable overhead. D. Direct labor. 38. A ? An irrelevant cost in considering a special order situation.  Irrelevant costs are not used in making decisions. They do not change from an alternative to another, meaning they are constant from one option to another, and they do not relate to the future. Among the choices, only depreciation expense would remain the same regardless of accepting or rejecting a special order, hence, an irrelevant cost. Choice-letters “b”, “c”, and “d” are incorrect because they are variable costs and are expected to change in relation to the decision of accepting or rejecting a special order. As such, variable overhead, materials, and direct labor are relevant cost with respect to this decision situation.

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39. When only differential manufacturing costs are taken into account for special-order pricing, an essential assumption is that A. Manufacturing fixed and variable costs are linear. B. Selling and administrative fixed and variable costs are linear. C. Acceptance of the order will not affect regular sales. D. Acceptance of the order will not cause unit selling and administrative variable costs to increase. (aicpa) 39. C ? An assumption for special-pricing decision.  In special-pricing decision, the assumptions used in cost-volume-profit relationships are also used In addition, an essential assumption is that regular sales are not affected by the acceptance of the special sales order, hence, choiceletter “c” is correct. Choice-letters “a” and “b” are regular assumptions in CVP analysis and are not peculiar in the accept or reject a special sales order decision. Choice-letter “d” is incorrect because special sales may change variable selling and administrative costs due to the increase in the level of activity. 40. Production of a special order will increase gross profit when the additional revenue from the special order is greater than A. The direct materials and labor cost in producing the order. B. The fixed costs incurred in producing the order. C. The indirect costs of producing the order. D. The marginal cost of producing the order (aicpa) 40. D ? A case where the acceptance of a special order increases gross profit.  Choice-letter “d” is correct because acceptance of a special order increases profit when the incremental increase in revenue is greater than the incremental increase in costs. Marginal cost of producing a special order is an incremental cost. Choice-letter “a” is incorrect because direct materials and direct labor are not the only costs that may increase on the acceptance of special order. Other incremental costs include variable overhead, variable expenses, and incremental fixed overhead. Choice-letter “b” is incorrect because fixed cost, as it is generally assumed unless the problem states otherwise, shall be considered constant and thereby is not incremental. Choice-letter “c” is also incorrect since the indirect cost of producing an order may be fixed and/or variable; the former is presumed to be constant while the latter is differential. 41. When considering a special order that will enable a company to make use of currently idle capacity, which of the following cost is irrelevant? A. Materials. C. Direct Labor. B. Depreciation. D. Variable overhead. (cma) 41. B ? An irrelevant cost in considering a special order.

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397

 Irrelevant costs are those that do not vary between alternatives and to be incurred in the future. Classic examples are the unavoidable fixed costs and expenses, sunk costs, and common (or joint) costs. Choice-letter “b” is an irrelevant cost because depreciation expense arises from transaction of past period and therefore is always sunk and irrelevant in making nonroutine short-term decisions. Choice-letter “a”, “c”. and “d” are all variable costs, incremental in nature, normally considered, and therefore are relevant, in making short-term decisions. 42. Which of the following cost allocation price that can be quoted for special production area? A. Job Order. C. B. Process. D.

methods is used to determine the lowest order that will use idle capacity within a Variable. Standard

(aicpa).

42. C ? The one used in determining the lowest price in special order.  Special sales order is considered acceptable when there is an incremental profit derived from it. Profit germinates when incremental sales are greater than incremental costs. Ergo, the lowest price for a special sales order shall be the incremental cost of producing the order. Of the given, only variable cost is the incremental cost. Job order, process, and standard as given on the choices are methods of accumulating, not of allocating, cost. 43. Tagaytay Open-Air Flea market is along the highway leading to Taal Vista Lodge. Arnel has a stall which specializes in hand-crafted fruit baskets that sell for P60 each. Daily fixed costs are P15,000 and variable cost are P30 per basket. An average of 750 baskets are sold each day. Arnel has a capacity of 800 baskets per day. By closing day time yesterday, a bus load of teachers who attended a seminar at the Development Academy of the Philippines stopped by Arnel’s stall. Collectively, they offered Arnel P1,500 for 40 baskets. Arnel should have A. Rejected the offer since he could have lost P500. B. Rejected the offer since he could have lost P900. C. Accepted the offer since he could have P300 contribution margin. D. Accepted the offer since he could have P700 contribution margin. (rpcpa) 43. C ? Accept or reject special sales order.  In a short-term decision of accepting a special sales order, the special sales must result to an increase in profit and that there is no effect on regular sales. If ever there is an effect on regular sales, the lost contribution margin on regular sales must be considered. If the lost CM from regular sales is less than the potential increase in profit from accepting the special sales order, then it should be accepted. The incremental analysis is shown below: Incremental sales P1,500 Incremental costs (40 baskets x P30) (1,200) Incremental profit P 300 The special sales order should be accepted because it increases profit by P300.

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44. Wagner Company sells product A at a selling price of P21 per unit. Wagner’s cost per unit on the full capacity of 200,000 units are as follows: Direct materials P 4 Direct labor 5 Overhead (2/3 of which is fixed) 6 Total P15 A special order offering to buy 20,000 units was received from a foreign distributor. The only selling costs that would be incurred on this order would be P3 per unit for shipping. Wagner has sufficient existing capacity to manufacture the additional units. Wagner should consider that the minimum selling price per unit should be A. P 14 C. P 16 B. P 15 D. P 18 (aicpa) 44. A ? The minimum selling price per unit.  Since there is no opportunity costs, the minimum selling price should at least equal the incremental cost to avoid a loss. The incremental costs are: Per Unit Direct materials P 4 Direct labor 5 Variable overhead (1/3 x P6) 2 Variable shipping cost 3 Total incremental cost P14 45. The manufacturing capacity of Jordan Company’s facilities is 30,000 units of product a year. A summary of operating results for the year ended December 31, 2006, is as follows: Sales (18,000 units @ P100) P1,800,000 Variable manufacturing and selling costs 990,000 Contribution margin 810,000 Fixed costs 495,000 Operating income P 315,000 A foreign distributor has offered to buy 15,000 units at P90 per unit during 2007. Assume that all of Jordan/s costs would be at the same levels and rates in 2007 as in 2006. If Jordan accepted this offer and rejected some business from regular customers so as not to exceed capacity, what would be the total operating income for 2007? A. P390,000 C. P840,000 B. P705,000 D. P855,000 (aicpa) C. 45. B ? The expected operating income for 2007, if Jordan Company accepts the specials sales order.  The special sales accounts for 15,000 units, this leaves another 15,000 units (i.e., 30,000 units – 15,000 units) for regular sales. The unit variable cost of P55 (i.e.,

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399

P990,000 / 18,000 units) will remain the same. The unit contribution margin for regular and special sales are as follows: Contribution margin Regular sales (P810,000 / 18,000 units) P 45 per unit Special sales (P90 – P55) 35 per unit The fixed costs P495,000 shall remain the same. The operating income if the special sale is accepted shall be: Contribution margin: Regular sales (15,000 units x P45) P675.000 Special sales (15,000 units x P35) 525,000 P1,200,000 - Fixed costs 495,000 Operating income P 705,000 46. F&S. Inc., has an annual capacity of 2,800 for the year as follows: Sales 2,000 units at P760 each Manufacturing costs: Variable Fixed Marketing and administrative costs: Variable (sales and commissions) Fixed

units of output. Its predicted operations P1,520,000 P500 per unit P360,000 P120 per unit P40,000

Assume there would be no effect on regular sales at regular prices and that the usual sales commission will be reduced to half. Should the company accept at onetime only special order for 600 units at a selling price of P640 each? A. Yes, due to incremental income of P48,000. B. Either on would do as the net effect would be the same. C. Yes, due to incremental income of P30,000. D. No, due to the resulting loss of P37,714. (rpcpa) 46. A ? Should the company accept a one-time only special order at a selling price of P640.  The regular sales are not affected and the sales commission is reduced to half. The fixed costs and expenses are irrelevant because they are assumed to remain constant in the short-run. The incremental (loss) is shown below: Incremental sales (640 units x P600) P384,000 - Incremental costs and expenses: Variable manufacturing (600 x P500) P300,000 Variable expenses (600 x P60) 36,000 336,000 Incremental profit P 48,000 47. Ham and Sam Co. has an offer for a special order of 100,000 units at a unit price of P6.00. Presented below: 1. Present production at 85% capacity, 450,000 units. 2. Fixed factory overhead is P1,250,000 at 100% capacity. 3. Variable direct costs per unit are: Materials, P1.80; labor, P1.40.

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Short-term non-routine decisions

400

Variable factory overhead per unit, P0.50. Variable marketing expense per unit, P0.50. Fixed general and administrative expenses, P800,000. Additional lease cost for additional equipment required for the special order, P10,000.

The accountant estimated that the order will result as follows: Revenue P600,000 Differential cost of goods sold: Direct materials P180,000 Direct labor 140,000 Variable factory overhead 50,000 Fixed factory overhead 250,000 620,000 ( 20,000) Variable marketing expenses 50,000 Loss on this order P(70,000) The calculation has these problems: A. Fixed factory overhead has been overapplied. B. Fixed general and administrative expenses and incremental lease cost have been ignored. C. Lease cost has been ignored and fixed factory overhead has been overapplied. D. Fixed factory overhead has been allocated and additional lease cost has been ignored. (rpcpa) 47. D ? Problems observed in the given calculation.  The company is entertaining the acceptance or rejection of a special sales order from a customer. Under the principle of short-term decision analysis, the special order should be accepted if it increases the overall profit of the organization. Using the incremental cost analysis, the quantitative treatment would be as follows: Incremental revenue (100,000 x P6) P600,000 Less: Incremental costs: Direct materials (1000,000 x P1.80) P180,000 Direct labor (100,000 x P1.40) 140,000 Variable factory overhead (100,000 x P0.50) 50,000 Equipment rental 10,000 380,000 Incremental profit if the order is accepted 220,000 Less: Lost contribution margin from regular sales Maximum capacity (450,000/85%) 529,412 Less: Present Capacity 450,000 Excess capacity 79,412 Lost regular sales to accommodate the special order (100,000 – 79,412) 20,588 x Unit contribution margin Unit sales price P6.00 Unit direct material cost (1.80) Unit direct labor (1.40) Unit variable overhead (0.50)

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Unit variable expenses (0.50) Unit contribution margin Net advantage of accepting the special order

P 1.80

401

37,058 P182,942

48. Nore Milling Co. has a plant capacity of 40,000 units per month. Unit cost capacity are: Direct materials P100 Direct labor 150 Variable overhead 75 Fixed overhead 75 Marketing fixed cost 175 Marketing variable costs 90 Present monthly sales are 39,000 units at P630 each. Josh Corporation contacted Nore about purchasing 1,000 units at P600 each. The present sales would not be affected by the special order. Nore should. A. Accept the special order due to P185,000 incremental income. B. Accept the special order due to P110,000 incremental income. C. Accept the special order due to P215,000 incremental income. D. Accept the special order due to P10,000 incremental income. (rpcpa) 48. A ? Accept or reject a special sales order.  The special sales order should be accepted if it would increase the operating profit of the business. Based on the data given, the incremental contribution margin (ergo, incremental profit) is P185,000 as shown below: Unit CM [P600 – (P100 + P150 + P75 + P90)] P 185 Incremental CM (1,000 units x P185) P185,000 It is, therefore, advisable for the business to accept the special sales order and increase profit by P185,000. 49. The Mapili Corp. which has experienced excess production capacity received a special offer for its product P at P78 per unit for 100,000 units. It has been using the variable costing method and has been pricing its product at P96 per unit based on a mark-up of 60% as follows: Overhead materials P30 Direct labor 20 Variable overhead 6 Variable selling and administrative 4 Total variable expenses 60 60% mark-up 36 Selling price P96 Assuming that this special offer will not affect the market for the product, should the company accept the special offer? A. Yes, since it will contribute P2.8 million margin. B. Yes, since it will contribute P1.8 million margin. C. No, since it will mean a loss of P1.8 million. D. No, since it will mean a loss of P1.16 million. (rpcpa)

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49. D ? Accept or reject a special order.  The quantitative analysis to be used in deciding whether to accept or reject a special sales order (meaning, not on a regular sales order), must consider relevant (incremental) costs to manufacture and sell compared with that of the incremental sales. Incremental cost to manufacture normally includes direct materials, direct labor, variable overhead, and variable expenses. Opportunity costs such as lost contribution margin from regular sales is treated as a deduction from the incremental revenue. In case fixed costs and expenses increase due to the acceptance of the special sales order, such increase in fixed costs shall be considered as an incremental cost to make. The quantitative analysis in the problem shall be: Incremental revenue (100,000 units x P78) Less: Incremental cost (100,000 units x P60) Incremental profit

P7,800,000 6,000,000 P1,800,000

Acceptance of the special sales order will give rise to an additional profit of P1.8 million. 50. Woody Corporation which manufactures slippers, has enough idle capacity available to accept one-time only special order of 20,000 pairs of slippers at P6 a pair. The normal selling price is P10 a pair. Variable manufacturing costs are P4.50 a pair, and fixed manufacturing costs are P1.50 a pair. Woody will not incur any marketing costs as a result of the special order. What would be the effect on operating income be if the special order could be accepted without affecting normal sales? A. P 0 C. P 90,000 increase B. P30,000 increase D. P120,000 increase (aicpa) 50. B ? Effect to operating income of accepting a special order.  The effect to operating income of accepting a special order shall be the difference between incremental sales and incremental costs as follows: Incremental sales (20,000 units x P6) P120,000 - Incremental costs (20,000 units x P4.50) 90,000 Incremental profit P 30,000 51. Jerry Company budgeted sales of 400,000 plastic gums at P40 per unit for 2005. Variable manufacturing costs were budgeted at P16 per unit, and fixed manufacturing costs at P10 per unit. A special order offering to buy 40,000 plastic gums for P23 each was received by Jerry in March 2006. Jerry has sufficient plant capacity to manufacture the additional quantity; however the production would have to be done on an overtime basis at an estimated additional cost of P3 per plastic gums. How much is the effect to operating income of accepting the special order? A. P240,000 decrease. C. P160,000 increase. B. P120,000 decrease. D. P280,000 increase.

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51. C ? Effect of accepting the special order.  The incremental cost per units is P19 (i.e., P16 + P3). The effect of accepting the special offer shall be as follows: Increase in sales (40,000 units x P23) P920,000 - Increase in costs (40,000 units x P19) 760,000 Increase in profit P160,000 52. A Company manufactures a product that is sold for P37.95. It uses absorption cost system. Plant capacity is 750,000 units annually, but normal volume is 500,000 units. Costs at normal are given below. Unit Cost Total Cost Direct materials P 9.80 P4,900,000 Direct labor 4.50 2,250,000 Manufacturing overhead 12.00 6,000,000 Selling and administrative: Variable 2.50 1,250,000 Fixed 4.20 2,100,000 Total cost P33.00 P16,500,000 Fixed manufacturing overhead is budgeted at P4,500,000. A customer has offered to purchase 100,000 units at P25.00 each to be packaged in large cartons, not the normal individual containers. It will pick up the units in its own trucks. Thus variable selling and administrative expenses will decrease by 60%. The company should compare the total revenue to be derived from this order with the total relevant costs of: A. P1,830,000 C. P2,930,000 B. P1,880,000 D. P3,150,000 (cia) 52. A ? Relevant costs of accepting a special order.  All incremental costs are relevant costs in analyzing the acceptance or rejection of a special order. The unit fixed overhead of P9 (i.e., P4,500,000 / 500,000 units) is irrelevant. The incremental unit costs are as follows: Direct materials P 9.80 Direct labor 4.50 Variable overhead (P12 – P9) 3.00 Variable selling and administrative (P2.50 x 40% 1.00 Unit incremental costs and expense P18.30 The total relevant costs is P1,830,000 (i.e., 100,000 units x P18.30). 53. Clay Co. has considerable excess manufacturing capacity. A special job order’s cost sheet includes the following applied manufacturing overhead costs: Fixed costs P21,000 Variable costs 33,000

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The fixed costs include a normal P3,700 allocation for in-house design costs, although no in-house design will be done. Instead, the job will require the use of external designers costing P7,750. What is the total amount to be included in the calculation to determine the minimum acceptable price for the job? A. P36,700 C. P54,000 B. P40,750 D. P58,050 (aicpa) 53. B ? The minimum acceptable price for the job.  The minimum price shall not be lower than the incremental costs. The fixed cost of P21,000, both allocated and direct, shall not be included in the analysis as it remains constant regardless of whether the special order is accepted or not. The incremental costs are: Variable costs P33,000 Cost of external design 7,750 Incremental costs P40,750 Questions 54 through 55 are based on the following information. Kator Co. is a manufacturer of industrial components. One of their products that is used as a subcomponent in auto manufacturing is KB-96. This product has the following financial structure per unit: Selling Price P150 Direct materials P 20 Direct Labor 15 Variable manufacturing overhead 12 Fixed manufacturing overhead 30 Shipping and handling 3 Fixed selling and administrative 10 Total costs P 90 54. Kator Company has received a special, onetime, order for 1,000 KB-96 parts. Assuming Kator has excess capacity, the minimum price that is acceptable for this onetime special order is in excess of A. P47 C. P60 B. P50 D. P77 (cma) 54. B ? The minimum price for the special order.  The minimum price equals the incremental costs plus the opportunity costs. The incremental cost per unit is P50 (i.e., P20 + P15 + P12 + P3) composed of direct materials, direct labor, variable overhead and shipping and handling (i.e., variable expenses). Since there is no opportunity cost, the incremental cost per unit is the minimum price to accept the special order. Above the minimum price, a sales price would contribute a profit, while below the minimum price, a sales price would give a loss. The fixed overhead, selling and administrative expenses are irrelevant costs. 55. During the next year, KB-96 sales are expected to be 10,000 units. All of the costs will remain the same except that fixed manufacturing overhead will increase by

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20% and direct materials will increase by 10%. The selling price per unit for the next year will be P160. Based on this data, contribution margin from KB-96 for next year will be A. P 620,000 C. P1,080,000 B. P 750,000 D. P1,110,000 (cma) 55. C ? The contribution margin for KB-96 for next year.  Contribution margin may also be computed by multiplying sales in units with the unit contribution margin, which is unit sales price less unit variable costs., as determined below: Unit sales price P 160.00 - Unit variable costs and expenses: Direct materials (P20 x 110%) (22.00) Direct Labor (15.00) Variable manufacturing overhead (12.00) Shipping and handling ( 3.00) Unit contribution margin 108.00 x No. of units to be sold 10,000 units Total contribution margin P1,080,000 56. Kator Company has received a special, onetime, order for 1,000 KB-96 parts. Assume that Kator is operating at full capacity, and the next best alternative use of the capacity of existing equipment is to produce LB-64, resulting in a contribution of P10,000. The minimum price that is acceptable, using the original data, for this one-time special order is in excess of A. P 60 C. P 87 B. P 70 D. P100 (cma) 56. A ? The minimum price given an opportunity cost.  When opportunity cost exists, such shall be added to the incremental cost to determine the minimum sales price. The opportunity cost presented here is the net benefit that could be derived from the best alternative use of the facilities had the special order not been accepted, which in this case amounts to P10,000. Therefore, the minimum unit sales price is P60, determined as follows: Incremental unit cost P50.00 Opportunity cost (P10,000 / 1,000 units) 10.00 Minimum unit price P60.00 Drop or continue a business segment 57. Division A of Division Experts Corporation is being evaluated for elimination. It has contribution to overhead of P400,000. It receives an allocated overhead of P1 million, 10% of which cannot be eliminated. The elimination of Division A would affect-pre-tax income by A. P400,000 decrease. C. P500,000 decrease. B. P400,000 increase. D. P500,000 decrease. (rpcpa)

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67. D ? The effect on pre-tax income on the elimination of Division A.  In deciding to drop or continue a division, the focus of the analysis is the segment (or direct) margin. As long as the product margin is positive and there are no other opportunity costs, the department, product or process should be discontinued. The marginal analysis format is shown below: PX Sales X Less: Variable CGS X Manufacturing margin X Less: Variable expense X Contribution margin X Less: Direct fixed costs and expenses X (focus here) Segment (Direct) margin X Less: Allocated fixed cost and expenses PX Net Income Applying this principle in the problem, we have: Contribution margin Controllable fixed overhead (P1 million x 90%) Segment margin

P 400,000 ( 900,000) P(500,000)

Since, the segment margin is negative, the division should be dropped to eliminate the negative segment margin and increase the overall net income by P500,000. 58. Gata Company plans to discontinue a department with P48,000 contribution to overhead, and allocated overhead of P96,000, of which P42,000 cannot be eliminated. What would be the effect of this discontinuance on Gata’s pretax profit? A. Increase of P48,000. C. Increase of P6,000 B. Decrease of P48,000. D. Decrease of P6,000 (aicpa) 58. C ? Effect to pretax profit if a department is discontinued.  The segment margin of the discontinued department should be determined to know the effect of its discontinuance to profit: Contribution margin P 48,000 - Avoidable fixed overhead (P96,000 – P42,000) 54,000 Segment margin P( 6,000) Inasmuch as the segment margin of the department is negative, it should be discontinued to increase the overall profit of the company by the eliminated negative segment margin, choice-letter “c” is correct. In the same token, if the segment margin of a department is positive, it should be continued, assuming no better alternative use of facility, to maintain the income contributed by the department for the overall profitability of the company. 59. Rice Corporation currently operates two divisions which had operating results for the year ended December 31, 2006 as follows:

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West Division Sales P600,000 Variable costs (310,000) Contribution margin 290,000 Fixed costs for the Division (110,000) Margin over direct costs 180,000 Allocated common costs ( 90,000) Net income (loss) P 90,000

Troy Division P300,000 (200,000) 100,000 ( 70,000) 30,000 ( 45,000) P( 15,000)

Since the Troy Division also sustained an operating loss during 2006, Rice’s president is considering the elimination of this division. Assume that the Troy Division fixed costs could be avoided if the division were eliminated. If the Troy Division had been eliminated on January 1, 2006, Rice Corporation’s 2006 operating income would have been: A. P15,000 higher. C. P45,000 lower. B. P30,000 lower. D. P60,000 higher. (aicpa) 59. B ? Effect to operating income in 2006 if Troy Division is eliminated.  If Troy Division is eliminated, its positive direct margin (e.g., margin over direct costs) shall be eliminated. This means that the overall profit of the business shall decrease by the amount of the eliminated positive direct margin of P30,000. Alternatively, the change in profit could be determined by getting the difference in profit before and after Troy Division is eliminated, computed as follows: Direct margin of West Division P180,000 - Allocated common costs (P90,000 + P45,000) 135,000 Operating income if Troy is eliminated 45,000 - Operating income is Troy is discontinued (P90,000 income – P15,000 loss) 75,000 Decrease in operating income P(30,000) 60. A company produces and sells three products: C Sales P200,000 Separate (product) fixed costs 60,000 Allocated fixed costs 35,000 Variable costs 95,000

J P150,000 35,000 40,000 75,000

P P125,000 40,000 25,000 50,000

The company lost its lease and must move to smaller facility. As a result, total allocated fixed costs will be reduced by 40%. However, one product must be discontinued. The expected net income (loss) after the appropriate product has been discontinued is A. P10,000 C. P20,000 B. P(15,000) D. P25,000 (cia) 60. D ? The expected income after the appropriate product is discontinued.  The segment margin of each product should be computed to determine which must be discontinued as follows:

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Short-term non-routine decisions

Sales Variable costs Separate (direct) fixed costs Segment margin

C P200,000 ( 95,000) ( 60,000) P 45,000

J P150,000 ( 75,000) ( 35,000) P 40,000

P P125,000 ( 50,000) ( 40,000) P 35,000

Product P gives the lowest profit and shall be eliminated inasmuch as only two products shall now be produced by the company as they move to a smaller facility. With products C and J remaining, the operating profit of the business shall be: Segment margin (P45,000 + P 40,000) P 85,000 - Allocated fixed costs [(P35,000 + P40,000 + P25,000) x 60%] 60,000 Operating income (loss) P 25,000 Choice-letter “b” is correct. The allocated fixed cost remains unchanged at P100,000 regardless of whether a product or discontinued or not. 61. The table Top Model Corp. produces three products, “Tic”, Tac” and “Toc”. The owner desires to reduce production load to only one product line due to prolonged absence of the production manager. Depreciation expense amounts to P600,000 annually. Other fixed operating expenses amount to P660,000 per year. The sales and variable cost data of the three products product are (000’s omitted): Tic Tac Toc Sales P6,600 P5,300 P10,800 Variable costs 3,900 1,700 8,900 Which product must be retained and what is the opportunity cost of selecting such product line? A. Retained product “Tac”; opportunity cost is P4.6 million. B. Retained product “Tac”; opportunity cost is P3.14 million. C. Retained product “Tic”; opportunity cost is P4.04 million. D. Retained product “Toc”; opportunity cost is P4.48 million. (rpcpa) 61. A ? The product that must be retained and the opportunity cost of selecting such product line.  The product that must be retained is the one that gives the highest contribution margin based on the company’s limited resource. The problem does not give a company’s limited resource. Therefore, it could be assumed that there is no limited resource. The basis in making a decision shall be on the contribution margin (in this case, the CMRatio) Tic Tac Toc Sales P6,600,000 P5,300,000 P10,800,000 Variable costs (3,900,000) (1,700,000) (8,900,000) Contribution margin P2,700,000 P3,600,000 P 1,900,000 CMRatio 40.91% 67.92% 17.59%

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Product Tac is the most profitable product with the highest CMR of 67.92%, therefore, it is the product that must remain if two products are to be eliminated. Choosing product Tac means sacrificing the contribution margin of product Tic (P2.7 million) and product Toc (P1.9 million) or a total opportunity costs of P4.6 million. 62. Nakinnat Corporation’s Outlet No. 5 reported the following results or operations for the period just ended: Sales P2,500,000 Less: Variable expenses 1,000,000 Contribution margin 1,500,000 Less: Fixed expenses Salaries and wages P750,000 Insurance on inventories 50,000 Depreciation on equipment 325,000 Advertising 500,000 1,625,000 Net income (Loss) (P 125,000) The management is contemplating the dropping of outlet No. 5 due to the unfavorable operational results. If this would happen, one employee will have to be retained with an annual salary of P150,000. The equipment has no resale value. Outlet No. 5 should A. Not be dropped due to foregone overall income of P850,000. B. Be dropped due to foregone overall income of P325,000. C. Not be dropped due to foregone overall income of P25,000. D. Be dropped due to overall operational loss of P25,000 . (rpcpa) 62. A ? The quantitative effect of dropping or continuing outlet no. 5.  In the short-term analysis of dropping or continuing the operations of a department, product lines, activity or process, the focus of the analysis is the segment (or direct, product) margin. As long as the segment margin is positive and there are no other opportunity costs, the department, etc. should be discontinued. The marginal analysis format is shown below: Contribution margin P1,500,000 Direct controllable fixed cost: Salaries and wages (P750,000 – P150,000) (600,000) Insurance on inventories (50,000) Direct controllable margin P850,000 The depreciation on equipment is a fixed cost while advertising is considered here as an allocated costs. Both are unavoidable costs and are irrelevant in deciding whether to drop or continue outlet no.5. In as much as the direct controllable margin is positive and there is no given opportunity costs in using the released facilities, the department must be continued because dropping the department would mean reducing the overall profit of the business by P850,000.

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Short-term non-routine decisions

63. High Class Townhouse, Inc. manages five upscale townhouse in Makati, Ortigas and Greenhills area. Shown below are the summary income statements for each complex. In Thousand Pesos One Two Three Four Five Rent income 10,000 12,100 23,470 18,780 10,650 Expenses 8,000 13,000 26,000 24,000 13,000 Profit 2,000 (900) (2,530) (5,220) (2,350) Included in the expenses is P12,000,000 of corporate overhead allocated to the townhouse based on rental income. The complex that the company should consider dropping: A. Three, four and five. C. Two, Three, Four and Five B. Four and Five. D. Four. (rpcpa) 63. B ? The complexes the company should consider dropping.  A division, product line, or department may be considered for sale or discontinued if the direct margin of the division, etc, is negative. Direct margin is the difference between contribution margin and direct fixed costs. Inasmuch as the problem does not specify the amounts of direct fixed costs, the focus of evaluation shall be on the contribution margin. The variable costs and expenses are not given and is therefore computed first, as follows: Total Expenses Less: Allocated fixed expenses (based on the ratio of rental revenue Variable Expenses

T

o 1 P8,000

w

n 2 P13,000

h

o 3 P26,000

u

s 4 P24,000

e

s 5 P13,000

1,600 P6,400

1,936 P11,064

3,755 P22,245

3,005 P20,995

1,704 P11,296

(The total rental revenue is P75,000,000. This fraction for townhouse No.1 is P10/P75; for Townhouse No. 2 is P12.1/P75, etc.)

The contribution margin of the townhouses are: T o w n h o 1 2 3 Rental Income P10,000 P12,100 P23,470 Variable Expenses 6,400 11,064 22,245 Contribution Margin P 3,600 P 1,036 P 1,225

u s 4 P18,780 20,995 (P2,215)

e s 5 P10,650 11,296 (P 646)

Townhouses 4 and 5 reflect a negative contribution margin and are therefore to be recommended for discontinuance because these townhouses are not contributing to but are instead reducing the overall profit of the company. There are no opportunity costs given that may be considered in the analysis. Questions 64 through 66 are based on the following information. Condensed monthly operating income data for Frodo Baggins, Inc. for May 31, 2006 follow:

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Sales Variable costs Contribution Margin Direct fixed costs Store segment margin Common fixed cost Operating income

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Urban Store P80,000 32,000 48,000 20,000 28,000 4,000 P24,000

Suburban Store P120,000 84,000 36,000 40,000 (4,000) 6,000 P(10,000)

Total P200,000 116,000 84,000 60,000 24,000 10,000 P 14,000

Additional information regarding Frodo’s operations follows:  One-fourth of each store’s direct fixed costs would continue if either is closed.  Frodo allocates common fixed costs to each store on the basis of sales pesos.  Management estimates that closing Suburban Store would result in a 10% decrease in Urban Store’s sales whereas closing Urban Store would not affect Suburban Store’s sales.  The operating results for May 2006 are representations of all months. 64. A decision by Frodo to close Suburban Store would result in a monthly increase (decrease) in Frodo’s operating income of A. P (10,800) C. P 4,000 B. P (6,000) D. P 10,000 (cma) 64. A ? Effect to operating income of closing Suburban Store.  If Suburban Store is closed, its controllable segment margin shall be eliminated plus 10% of Urban Store’s contribution margin. The effect of closing Suburban Store to the overall profit of Frodo Baggins, Inc., is as follows: Contribution margin – Suburban P36,000 - Avoidable direct fixed costs(P40,000 x ¾) (30,000) Controllable margin - Suburban P 6,000 Decrease to profit due to the elimination of contribution margin of Suburban Store 10% decrease in the contribution margin of Urban Store (P48,000 x 10%) Total decrease in overall profit if Suburban is closed

P 6,000 4,800 P10,800

65. Frodo is considering a promotional campaign at Suburban Store that would not affect Urban Store. Increasing annual promotional expense at Suburban Store by P60,000 in order to increase this store’s sales by 10% would result in a monthly increase (decrease) in Frodo’s operating income during 2006 (rounded) of A. P (5,000) C. P 7,000 B. P (1,400) D. P 12,000 (cma) 65. B ? Increase (decrease) in operating income if promotional expense is spent.  By spending an annual promotional expense of P10,000, the sales of Suburban Store is expected to increase by 10%. The effects to profit shall be as follows:

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Short-term non-routine decisions

Increase in contribution margin (P36,000 x 10%) - Increase in promotional expense (60,000 / 12 mos.) Decrease in profit

P 3,600 ( 5,000) P(1,400)

66. One-half of Suburban Store’s peso sales are from items sold at variable cost to attract customers to the store. Frodo is considering the deletion of these items, a move that would reduce Suburban Store direct fixed expenses by 15% and result in a 20% loss of Suburban Store’s remaining sales volume. This change would not affect Urban Store. A decision by Frodo to eliminate the items sold at cost would result in a monthly increase (decrease) in Frodo’s operating income during 2005 of A. P(5,200) C. P 2,000 B. P(1,200) D. P 6,000 (cma) 66. B ? Effect to profit if the units sold at variable cost are eliminated.  If the units sold at variable cost are eliminated, the contribution margin of Suburban Store shall still be P36,000. Consequently, 20% of the remaining sales would be lost and direct fixed expenses will reduce by 15%. Their net effects to profit shall be: 20% loss in contribution margin (P36,000 x 20%) P(7,200) 15% decrease in fixed expenses (P40,000 x 15%) 6,000 Net decrease to overall profit P(1,200) Optimization of scarce resources 67. When a multi-product plant operates at full capacity, quite often decisions must be made as to which products to emphasize. These decisions are frequently made with a short-run focus. In making such decisions, manager should select products with the A. Highest sales price per unit. B. Highest individual unit contribution margin. C. Highest volume potential. D. Highest contribution margin per unit of the constraining resource. (cma) 67. D ? The product to be produced in a short-term decision.  Short-term decisions focus on profitability and liquidity. Choice-letter “d” is correct because profitability is best measured by the contribution margin per constraining resource (e.g., machine hours, direct labors, etc.). Choice-letter “a” is incorrect since sales price does not accurately gauge returns and profitability. Choice-letter “b” is an inferior choice because unit contribution margin is not an eventual measure of utmost profitability especially when a constraining resource is not the production capacity in units. Choice-letter “c” is also incorrect because a production potential does not translate to profit, neither does volume of units sales automatically predict profitability. 68. Pinoy Company temporarily has excess production capacity. The idle plant facilities can be used to manufacture a low-margin item. The low-margin item should be produced if it can be sold for more than its

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Short-term non-routine decisions

Variable costs plus any opportunity costs of idle facilities. Indirect costs plus any opportunity cost of the idle facilities. Fixed costs. Variable costs.

413

(rpcpa)

68. A ? When should a low-margin product be produced if a company has excess plant capacity?  If a company has an excess plant capacity, a low-margin product can be produced as long as its selling price is greater than the incremental costs of production and operations (i.e., variable costs and variable expenses) plus any opportunity costs of idle facilities. The fixed cost is irrelevant because it is assumed to remain the same. 69. S. Kent Co. has a limited number of machine hours that it can use for manufacturing two products, A and B. Each product has a selling price of P160 per unit but product A has 40% contribution margin and product B has a 70% contribution margin. One unit of B takes twice as many machine hours to make as a unit of A. Assume either product can be sold in whatever quantity is produced, which product or products should the limited number of machine hours be used for? A. A. C. Either A or B. B. Both A and B. D. B. (rpcpa) 69. A ? The product to be produced in using the limited machine hours.  The limited resource is the machine hours. To optimize the limited machine hours, the product to produce should be the one that gives the higher contribution per hour computed as follows: A B. Unit contribution margin (P160 x 40%) P 64 P 96 (P160 x 60%) ÷ No. of hours per unit 1 hr. 2 hrs. Contribution margin per hour P 64 P 48 Rank of priority (1) (2) Product A, having higher contribution margin per hour, should be produced instead of B. All the limited machine hours should be used in producing product with the higher contribution margin per hour (e.g., rate of profitability) assuming there is no limitation as to production capacity and market demand. 70. Product A has a contribution margin of P80 per unit, a contribution margin ratio of 50 percent, and requires 4 machine hours to produce. Product B has a contribution margin of P120 per unit, a contribution margin ratio of 40 percent, and requires 5 machine hours to produce. If the company has limited machine hours available, then it should produce and sell A. Product B since it has the higher contribution margin per unit. B. Product A since it requires fewer machine hours per unit than does Product B. C. Product B since it has the higher contribution margin per machine hour. D. Product A since it has the higher contribution margin per machine hour. (rpcpa)

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70. A ? The product to be produced and sold given a limitation in machine hours.  The product to be produced and sold should give the higher contribution margin per machine hour, calculated as follows: Product A Product B Unit contribution margin P 80 P 120 / Machine hours per unit 4 hours 5 hours Contribution margin per hour P 20 P 24 Priority (1) (2) Product B should be prioritized over that of product A because it gives a higher contribution margin per hour, and expectedly a higher profit to the company. 71. Data regarding four different products manufactured by an organization are presented below. Direct materials and direct labor are readily available from their respective resource markets. However, the manufacturer is limited to a maximum of 3,000 machine hours per month. Product A B C D Selling price/unit P15 P18 P20 P25 Variable cost/unit P17 P11 P10 P16 Units produced per machine hour 3 4 2 3 The product that is the most profitable for the manufacturer in this situation is A. Product A. C. Product C. B. Product B. D. Product D. (cia) 71. B ? The most profitable product for the manufacturer.  The most profitable product gives the highest contribution margin per resource constraint, in this case is machine hours, determined as follows: A B C D Unit contribution margin (USP – UVC) P(2) P 7 P10 P9 x No. of units per machine hour 3 4 2 3 Contribution margin per machine hour P(6) P28 P20 P27 Rank of priority (4) (1) (3) (2) Product B must be prioritized in production over the other products because it has the highest rate of profitability per machine hour. Questions 72 and 73 are based on the following information. Gandalf Manufacturing has assembled the data appearing in the next column pertaining to two products. Past experience has shown that the unavoidable fixed factory overhead included in the cost per machine hour averages P10. Gandalf has a policy of filling all sales orders, even if it means purchasing units from outside suppliers. Blender Electric Mixer Direct Materials P6 P11 Direct Labor 4 9 Factory overhead at P16 per hour 6 32 Cost if purchased from an outside supplier 20 38 Annual demand (units) 20,000 28,000

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72. If 50,000 machine hours are available, and Gandalf Manufacturing desires to follow an optimal strategy, it should A. Produce 25,000 electric mixers and purchase all other units as needed. B. Produce 20,000 blenders and 15,000 electric mixers and purchase all other units as needed. C. Produce 20,000 blenders and purchase all other units as needed. D. Produce 28,000 electric mixers and purchase all other units as needed. (cma) 72. B ? The optimal use of 50,000 machine hours.  In using limited resources, the product that has the highest contribution margin per limited resource (e.g., machine hour) shall be given the priority. Given the fixed factory overhead of P16 per hour, the number of hours to produce one unit of product shall be fixed overhead per unit divided by fixed overhead per hour. The number of hours to produced a unit is 1 hour for Blender (i.e., P16 pre unit/P16 per hour) and 2 hours for Electric Mixer (i.e., P32 per unit/P16 per hour). And the unit variable overhead per hour is P6 (i.e., P16 per hour – P10 per hour of fixed overhead) The CM per hour for product Blender and product Electric Mixer are computed as follows: Blender Electric Mixer Unit sales price P 20 P 38 Unit direct materials ( 6) ( 11) Unit direct labor ( 4) ( 9) Unit variable overhead (P6 x 1 hour) ( 6) (P6 x 2 hrs.) ( 12) Unit contribution margin 4 7 / No. of hours per unit 1 hr. 2 hrs. Contribution margin per hour P 4 P 3.50 Rank ( 1) (2) The limited resource shall be used to produce Blender. But, the production of Blender is also subject to its market limit. The 50,000 machine hours shall be used as follows: Hours Total Rank Product Units per unit hours 1 Blender 20,000 1 hr. 20,000 2 Electric Mixer 15,000* 2 hrs. 30,000 bal. 50,000 * (30,000 hrs./2 hrs.)

Gandalf Manufacturing should produce 20,000 units of Blender and 15,000 units of Electric Mixer and purchase the remaining units 13,000 units of mixer (i.e, 29,000 units – 15,000 units) from an outside supplier. 73. With all other things constant, if Gandalf Manufacturing is able to reduce the direct materials for an electric mixer to P6 per unit, the company should

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Short-term non-routine decisions

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Produce 25,000 electric mixers and purchase all other units as needed. Produce 20,000 blenders and 15,000 electric mixers, and purchase all other units as needed. Produce 20,000 blenders and purchase all other units as needed. Purchase all units as needed. (cma)

73. A ? The optimal use of 50,000 machine hours if direct materials for electric mixer is reduced to P6 per unit.  The direct materials of electric mixer is reduced by P5 (i.e., P11 – P6), or its unit contribution margin is increased by P5. The new contribution margin per hour for each product shall be as follows: Blender Electric Mixer Unit contribution margin P 4 P12 (P7 + P5) ÷ No. of hours per unit 1 hr. 2 hrs. Contribution margin per hour P 4 P 6 Rank (2) (1) All the 50,000 machine hours shall be used to produce 25,000 units of electric mixer (i.e., 50,000 hours / 2 hrs. per unit). The annual demand for electric mixer is 28,000 units. The remaining 3,000 units (28,000 units – 25,000 units) of electric mixer will be purchased from outside supplier together with the annual demand for blender. Retain or replace an old asset 74. At December 31, 2006, Zar Company had a machine with an original cost of P84,000, accumulated depreciation of P60,000, and an estimated salvage value of zero. On December 31, 2006, Zar was considering the purchase of a new machine having a five-year life, costing P120,000, and having an estimated salvage value of P20,000 at the end of five years. In its decision concerning the possible purchase of the new machine, how much should Zar consider as sunk cost at December 31, 2006? A. P120,000 C. P 24,000 B. P100,000 D. P 4,000 (aicpa) 74. C ? The amount of sunk cost.  Sunk costs are those already incurred by reason of past transaction. The original cost of the old machine is P84,000, with an accumulated depreciation of P60,000. The net book value, which serves as the remaining sunk cost, is P24,000 (i.e., P84,000 – P60,000), choice-letter “c” is correct. Choice-letter “a” is incorrect because it is a future cost. Choice-letter “b” is incorrect because it is the net depreciable cost of the new machine which is also a future cost. Choice-letter “d” is incorrect its value has no meaningful reason for computation and is neither related to sunk cost. 75. Ysabelle Industries, Inc. has an opportunity to acquire a new equipment to replace one of its existing equipment. The new equipment would cost P900,000 and has a five-year useful life, with a zero terminal disposal price. Variable operating cost

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would be P1 million per year. The present equipment has a book value of P500,000 and a remaining life of five years. Its disposal price now is P50,000 but would be zero after five years. Variable operating costs would be P1,250,000 per year. Considering the five years in total, but ignoring the time value of money and income taxes, Ysabelle should A. Replace due to P400,000 advantage. B. Not replace due to P150,000 disadvantage. C. Replace due to P350,000 advantage. D. Not replace due to P100,000 disadvantage. (rpcpa) 75. A ? Replace or retain an old equipment.  The old equipment shall be replaced if the savings or income derived from the new equipment will be enough to absorb the cost of buying it. The data analysis on the short-term decision of “replace” or “retain” an old equipment is shown below: Retain Replace Purchase price P900,000 Book value P500,000 Useful life (remaining) 5 years 5 years Terminal salvage value 0 0 Salvage value – now 50,000 Variable operating costs 1,250,000 1,000,000 Annual savings in operating costs (P1,250,000 – P1,000,000) P 250,000 Therefore: Savings in 5 years (P250,000 x 5 yrs.) Salvage value of old equipment Total cash inflows Purchase price Net advantage of replacing the old equipment

P1,250,000 50,000 1,300,000 (900,000) P 400,000

The book value of the old asset is irrelevant. It is a sunk cost and cannot be changed regardless of the decision to be made. This analysis does not consider the time value of money and tax effects. 76. Chow Foods operates a cafeteria for its employees. The operations of the cafeteria require fixed cost of P470,000 per month and variable costs of 40% of sales. Cafeteria sales are currently averaging P1,200,00 per month. The company has the opportunity to replace the cafeteria with vending machines. Gross customer spending at the vending machines is estimated to be 40% greater than the current sales because the vending machines are available at all hours. By replacing the cafeteria with vending machines, the company would receive 16% of the gross customer spending and avoid cafeteria costs. A decision to replace the cafeteria with vending machines will result in a monthly increase (decrease) in operating income of A. P182,000 C. P(588,000) B. P258,800 D. P 18,800 (rpcpa)

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76. D ? The effect on monthly profit if the cafeteria is replaced with vending machines.  A comparative tabulation of data on the two alternatives (cafeteria or vending machines) is shown below: Vending Machines Cafeteria Sales P1,200,000 (P1.2 million x 140%) P1,680,000 Variable costs 40% of sales Fixed costs P470,000 Commission income 15% of sales The short-term effect on profit if the vending machines are used is: Income from vending machines P1,680,000 x 16%) Income from cafeteria: Contribution margin (P1.2 million x 60%) Fixed costs Net advantage of using the vending machines

P268,800 P720,000 (470,000)

250,000 P 18,800

77. Excellent Corp. produces motherboard at a special economic zone in Central Luzon. It is now considering to shift to new automated equipment instead of its present facility. Management was given the mandate to shift it its break even point will materially be improved with a minimum of 10% reduction in volume. Below are the pertinent information: Existing With Automation Sales in units 800,000 900,000 Selling price P 30 Variable cost per unit P 15 P 13 Fixed cost P775,000 P892,500 The company should A. not shift since the break even volume will not change. B. not shift since the break even volume will even increase by 1% with the automation. C. shift to automation since the 10% reduction in break even volume could be achieved. D. shift to automation since the reduction in breakeven volume will be more than 10%. (rpcpa) 77. B ? The basis of deciding whether the company should shift to automation or not.  The condition set by the management in determining whether to employ new automated equipment is to reduce the breakeven point by at least 10%. The comparative breakeven points are as follows: Existing New automation Fixed costs P775,000 P892,500 / Unit CM (P30 – P15) P 15 P 17 (P30 – P13) Breakeven point in units 51,667 52,500 Increase in BEP (833/51,667) 1.61%

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The company should not change its present equipment because changing its present equipment would even increase breakeven point by 1% rather than reducing it by at least 10%. Sell-as- is or process further a product 78. In the manufacturing process of Drigo Company, an output called substance “pooz” is disposed of as waste. Recently, the Research Department has discovered a process to convert this waste to detergent. The following data are available: 1. Cost of disposal is P20.00 per liter. 2. Additional processing cost will be P6.00 per liter. 3. Selling price of the new detergent is P14.00 per liter. 4. Joint costs to manufacture all products is P1.5 billion, of which P250,000 can be allocated to “pooz”. Which of the amounts are relevant in the decision to dispose or sell “pooz” as detergent? A. P20, P6, P14, P250,000. C. P1.5 billion, P250,000 B. P20, P6, P14. D. P20, P14, P1.5 billion, P250,000 (rpcpa) 78. B ? The relevant costs in the sell-or-dispose situation.  In the short-term decision of whether to sell at split-off point or process further a product, the following data and costs are considered relevant: selling price at splitoff point, selling price after further processing (final sales price), costs of further processing and savings from further processing. The common costs (or joint production costs) of the joint production process is a sunk costs, cannot be changed in the decision to be made, and is an irrelevant cost in the decision on whether to sell or process further a product. The relevant costs are: selling price at split-off point, P20; additional cost of further processing, P6; selling price after further processing, P14 (choice-letter “b” is correct). 79. Coco Company owns a large processing line which segregates coconuts into its components upon contract with breaker of the machine. Presently, it sells the coconut meat, juice, shell and husk to various manufacturers. A feasibility study is being made to process its components into “buko pies” for the meat, “buko juice” for the juice, flower pots for the shells, and fuel briquettes for the husk. At the segregation point, you gathered the following data per unit: Meat Juice Shell Husk Selling price P4.00 P2.00 P1.00 P1.00 Allocated joint cost 0.13 0.06 0.03 0.03 Profit (loss) P3.87 P 1.94 P0.97 P0.97 The study shows that after further application of additional manufacturing process, the following is projected: Meat Juice Shell Husk Selling price P12.00 P4.00 P2.00 P2.00 Additional processing cost 3.80 2.90 1.95 1.95

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Fixed cost of the plant amounts to P500,000. Interest rate is 12% Which product should go through the additional manufacturing process? A. Coconut meat only because it will give incremental profit of P4.20 per coconut. B. All products because all will give additional profits. C. Coconut meat only because it will give total profits of P12.08 per coconut. D. None because all will incur losses. (rpcpa) 79. A ? The product to be processed further.  In the short-term decision of whether to process further a product or sell at split-off point, the deciding criterion is whether there is an incremental profit from further processing or none. If there an incremental profit, the product should be processed further. Incremental profit is incremental sales less incremental costs. (e.g., additional costs of further processing). Meat Juice Shell Husk Increase in unit sales price (Final USP – USP at split-off point) P8.00 P 2.00 P1.00 P1.00 Less: Additional processing costs 3.80 2.90 1.95 1.95 Increase in profit (loss) P4.20 P(0.90) P(0.95) P0.95) To be processed further or not? Yes No No No Only product Meat is to be processed further because processing it further would give an incremental profit of P4.20 per unit. The other products should not be processed further because processing them further would result to a loss and will only deteriorate the overall profit performance of the company. The joint costs and fixed costs are relevant costs and are not included in the analysis. 80. Julius International produces weekly 15,000 units of Product JI and 30,000 units of product JII for which P800,000 common variable costs are incurred. These two products can be sold as is or processed further. Further processing of either product does not delay the production of subsequent batches of the joint products. Below are information: JI JII Unit selling price without further processing P24 P18 Unit selling price with further processing P30 P22 Total separate weekly variable costs of further processing P100,000 P90,000 To maximize Julius’ manufacturing contribution margin, the total separate variable costs of further processing that should be incurred each week are A. P95,000 C. P100,000 B. P90,000 D. P190,000 (rpcpa) 80. B ? The costs of separate processing must be incurred to maximize profit.  The costs of separate processing to be incurred shall be the costs of the product to be processed further. The product to be processed further is the one that contributes to the overall profit of the business if it is processed further. Of the two products, JII is to be processed further.

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Incremental sales (15,000 units x P6) (30,000 units x P4) Incremental costs of further processing Incremental (decremental) profit

JI P90,000 (100,000) P(10,000

JII P120,000 (90,000) P30,000

Product JII should be processed further because it will contribute P30,000 to the overall short-term profit of the business. Its costs of further processing is P90,000, hence, choice-letter “b” is correct. Questions 81 and 82 are based on the following information. Whitehall Corporation produces chemicals used in the cleaning industry. During the previous month, Whitehall incurred P300,000 of joint costs in producing 60,000 units of AM-12 and 40,000 units of BM-36. Whitehall uses the units-of-production method to allocate costs. Currently, AM-12 is sold at split-off for P3.50 per unit. Flank Corporation has approached Whitehall to purchase all of the production of AM-12 after further processing. The further processing will cost Whitehall P90,000. 81. Concerning AM-12, which one of the following alternatives is most advantageous? A. Whitehall should process further and sell to Flank if the total selling price per unit after further processing is greater than P3.00, which covers the joint costs. B. Whitehall should continue to sell at split-off unless Flank offers at least P4.50 per unit after further processing, which covers Whitehall’s total costs. C. Whitehall should process further and sell to Flank if the total selling price per unit after further processing is greater than P5.00. D. Whitehall should process further and sell to Flank if the total selling price per unit after further processing is greater than P5.25, which maintains the same gross profit percentage. (cma) 81. C ? The alternative that is most advantageous to WhiteHall Corporation with regard to product AM-12.  Choice-letter “c” is the correct answer because the selling price of product AM-12 if further processed is P5.00, calculated as follows: Selling price at split-off point P 3.50 Cost of further processing (P90,000 / 60,000 units) 1.50 Minimum price of AM-12 after further processing P 5.00 The selling price at split-off point should be included in the basis of determining the ultimate sales price of AM-12 in order to preserve the profit that could be derived if product AM-12 is sold at split-off point. Choice-letter “c” is correct because the ultimate sales price should be greater than P5.00. Choice-letter “a” is incorrect because the P3.00 (i.e., [(P300,000 x 60/100) / 60,000 units] is only the allocated joint cost to AM-12. Choice-letter “b” is also incorrect because P4.50 (i.e., P3.00 + P1.50) is the total unit cost of AM-12 after further processing which disregards an opportunity cost, that is, the profit that could have been derived if AM-12 is sold at split-off point. Choice-letter “d” is incorrect because P5.25 is not the optimum basis in determining the sales price after the

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split-off point. The minimum sales price after further processing is P5.00, based on nominal amount, and not P5.25 which is bases on gross profit percentage. 82 Assume that Whitehall Corporation agreed to sell AM-12 to Flank Corporation for P5.50 per unit after further processing. During the first month of production, Whitehall sold 50,000 units with 10,000 units remaining in inventory at the end of the month. With respect to AM-12, which one of the following statements is correct? A. The operating profit last month was P50,000, and the inventory value is P15,000. B. The operating profit last month was P50,000 and the inventory value is P45,000. C. The operating profit last month was P125,000, and the inventory is P30,000. D. The operating profit last month was P200,00 and the inventory is P30,000. (cma) 82. B ? The correct statement with respect to AM-12.  The choices given refer to both operating profit and inventory value of AM-12. The allocated unit cost for AM-12 is P3.00 [(P300,000 x 60/100) / 60,000 units] and the cost of further processing is P1.50. Therefore, the relevant unit cost of AM-12 is P4.50 (i.e., P3.00 + P1.50). The operating profit, which is in this case the gross margin because there is no expense account given, of AM-12 is determined as follows: Sales (50,000 units x P5.50) P275,000 - Cost of sales (50,000 x P4.50) 225,000 Gross profit (operating profit) P 50,000 The ending inventory is 10,000 (i.e, 60,000 units – 50,000 units). And the ending inventory value of AM-12 is P45,000 (i.e., 10,000 units x P4.50). Bid price 84. Lakas Engines Company manufactures engines for the military equipment on a cost-plus basis. The cost of a particular machine the company manufactures is shown below: Direct materials P400,000 Direct labor 300,000 Overhead: Supervisor’s salary 40,000 Fringe benefits on direct labor 30,000 Depreciation 24,000 Rent 22,000 Total P816,000 If the production of the engine were discontinued the production capacity would be idle, and the supervisor will be laid off. Should there be a next contract for this engine, the company should bid a minimum price of A. P816,000 C. P730,000 B. P700,000 D. P770,000 (rpcpa)

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84. D ? The minimum bid price for the next contract.  The minimum bid price should at least equal the incremental costs or production plus opportunity costs, if any. The incremental costs are: Direct materials P400,000 Direct labor 300,000 Supervisor’s salary 40,000 Fringe benefits on direct labor 30,000 Incremental costs P770,000 The costs of depreciation and rental are irrelevant costs because they are expected to be incurred regardless of whether the bidding is won or not. The minimum bid price is the incremental costs at P770,000. 85. Power systems, Inc, manufactures jet engines for the Philippine armed forces on a cost-plus basis. The cost of a particular jet engine the company manufactures is shown below: Direct materials P200,000 Direct labor 150,000 Overhead: Supervisor’ salary 20,000 Fringe benefits on direct labor 15,000 Depreciation 12,000 Rent 11,000 Total cost P408,000 If production of this engine were discontinued, the production capacity would be idle, and the supervisor would be laid off. When asked to bid on the next contract for this engine, the minimum unit price that Power Systems should bid is A. P408,000 C. P397,000 B. P365,000 D. P385,000 (cma) 85. D ? The minimum unit bid price.  The minimum unit bid price shall commensurate the incremental cost consists of the following: Direct materials P200,000 Direct labor 150,000 Supervisor’s salary 20,000 Fringe benefit on direct labor 15,000 Incremental cost/Minimum bid price P385,000 Depreciation and rent expenses are fixed costs and are not incremental costs. 86. Chow, Inc,. has its own cafeteria with following annual costs Food P 400,000 Labor 300,000 Overhead 440,000 Capital P1,140,000

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The overhead is 40% fixed. Of the fixed overhead, P100,000 is the salary of the cafeteria supervisor. The remainder of the fixed overhead has been allocated from total company overhead. Assuming the cafeteria supervisor will remain and that Chow will continue to pay said salary, the maximum cost Chow will be willing to pay an outsider firm to service the cafeteria is: A. P1,140,000 C. P700,000 B. P1,040,000 D. P964,000 (rpcpa) 86. D ? The maximum cost that the company is willing to pay an outsider to operate its cafeteria.  This refers to determining the maximum bid price. The company is entertaining the possibility of engaging the services of a cafeteria concessionaire. Presently it is operating its own cafeteria. The highest price that the company is willing to pay should not exceed its own incremental costs of operating the cafeteria which totals to P964,000, determined as follows: Food P400,000 Labor 300,000 Variable overhead (P440,000 x 60%) 264,000 Total incremental costs P964,000 87. Laurel Corporation has its own cafeteria with the following annual costs: Food P100,000 Labor 75,000 Overhead 110,000 Total P285,000 The overhead is 40% fixed. Of the fixed overhead, P25,000 is the salary of the cafeteria supervisor. The remainder of the fixed overhead has been allocated from total company overhead. Assuming the cafeteria supervisor will remain and that Laurel will continue to pay his/her salary, the maximum cost Laurel will be willing to pay an outside firm to service the cafeteria is A. P285,000 C. P219,000 B. P175,000 D. P241,000 (cma) 87. D ? The maximum cost Laurel will be willing to pay an outside supplier.  The maximum cost Laurel should be paying an outside supplier should not be greater than the relevant cost it incurred. The relevant cost includes incremental cost but does not include the unavoidable fixed cost. The variable overhead is 60% (i.e., 100% - 40%). The incremental costs of operating the cafeteria are: Food P100,000 Labor 75,000 Variable overhead (P100,000 x 60%) 66,000 Incremental cost P241,000 If an outside supplier charges less than P241,000, Laurel would have a saving; in excess of P241,000, Laurel would be incurring more cost. Laurel should not pay an outside supplier in excess of P241,000.

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Temporarily shut down the operations or continue it 88. The Mark X Corp. contemplates the temporary shutdown of its plant facilities in a provincial area which are economically depressed due to natural disasters. Below are certain manufacturing and selling expenses 1. Depreciation 5. Sales commissions 2. Property tax 6. Delivery expenses 3. Interest expense 7. Security of premises 4. Insurance of facilities Which of the following expenses will continue during the shutdown period? A. All expenses in the list. C. Items 1, 2 and 3 only. B. All except items 5 & 6. D. Items 1, 2, 3, 4, 6 and 7 only. (rpcpa) 88. B

?

The expenses that will continue to be incurred during the shut-down period.  Shut-down period is a temporary stoppage of production because operating the production line would mean a loss to the organization. The loss during the shutdown period is lower that the loss when continuing the operations. In the analysis of whether to shut down or continue the business operations, the shit down point serves as the benchmark. If sales are expected to be greater than the shut down point, the operations should be continued. Otherwise, it is not. At the shut down point, the loss from continuing the operations is equal to the loss from discontinuing the operations. During the shut-down period, there are still costs that are incurred. These are called shut-down costs. Examples of shut-down costs are: depreciation in the plant, property, taxes interest expense, insurance on facilities, security of premises, restart-up costs, retraining, salaries of plant executives, and the like. Sales commissions and delivery expenses are not shut-down costs because they are only incurred if the production continues and the goods are sold (choice-letter “b” is correct). Questions 89 to 91 pertain to the following information. Levy Corporation had been experiencing a slow down in business activities in August and September and is considering temporarily shutting down its operations during those months. The accounting department has provided the following normal operating data for considerations: Unit sales price P 150 Unit variable production costs 60 Unit variable marketing costs 10 Monthly fixed overhead 500,000 Monthly fixed expenses 200,000 Regular sales in units 10,000 per month Estimated sales in units in August and September 5,000 per month If the company shuts down its operations, the following costs are expected to be incurred: Security and safety P200,000 per month Re-start up costs P100,000 per set up

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40% of total will remain will be reduced by 30%

89. The total shut down costs amount to A. P840,000 C. P1,240,000 B. P940,000 D. P1,040,000 89. D ? The total shut down costs.  Shut down costs are those still incurred during the shut down period. Based on the data given, the shut down costs are: Unavoidable fixed overhead (P500,000 x 40% x 2) P 400,000 Unavoidable fixed expenses (P200,000 x 70% x 2) 140,000 Security and safety (P200,000 x 2) 400,000 Re-start up costs 100,000 Total shut down costs P1,040,000 90. The shut down point in two (2) months is A. 7,000 units C. 17,500 units B. 3,500 units D. 10,500 units 90. B ? The shut down point in two months.  Shut down point (SDP) is the level of sales where the loss from continuing the operations is equal to the shut down costs (e.g., loss from discontinuing the operations). To compute for the shut down cost, we need to know the fixed costs and expenses when operations are continued and the unit contribution margin, as presented below: Fixed costs and expenses [(P500,000 + P200,000) x 2 months] P1,400,000 Shut-down costs 1,040,000 Unit contribution margin (P150 – P60 – P10) 80 The computation of the SDP is shown below: Shut-down point = (Fixed costs and expenses – Shut-down costs) / UCM = [(P1,400,000 – P1,040,000} / P80] = 4,500 units To prove, we have: Contribution margin (4,500 x P80) P 360,000 - Fixed costs and expenses 1,400,000 Loss from continuing operations ( 1,040,000) - Shut down costs 1,040,000 No difference P 0 91. Which alternative, continuing or discontinuing the operations, is advisable and by how much is its advantage? A. P440,000, shutdown. C. P 60,000, shutdown. B. P440,000, continue. D. P 60,000, continue. 91 B ? The better alternative and the amount of its advantage.

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 To determine the better alternative, the loss from continuing the operations should be compared with the shut down costs, as follows: Contribution margin (5,000 units x 2 months x P80) P 800,000 - Fixed costs and expenses 1,400,000 Loss from continuing operations ( 600,000) - Shut down costs 1,040,000 Net advantage of continuing the operations P 440,000 Alternatively, it could be computed as follows: Loss of continuing operations at shut down point Loss of continuing operations Net advantage of continuing the operations

P1,040,000 600,000 P 440,000

Scrap or rework defective units 92. Imaw Corporation is considering to keep or dispose P1 million obsolete inventory acquired several years ago, this cost is A. Discretionary cost. C. Relevant cost. B. Sunk cost. D. Prime cost. (rpcpa) 92. B ? The classification of an obsolete inventory cost.  Choice-letter “b”, sunk cost, is correct. The cost of an obsolete inventory can no longer be avoided and will not change regardless of the decision to be made in the future. As such, it is already a past cost, sunk cost, and an irrelevant cost. Choice-letter “a”, discretionary cost is incorrect because such cost is normally future in orientation and could be changed by the decision maker. Choice-letter “c” is incorrect because a sunk cost is always an irrelevant cost. Choice-letter “d” is also incorrect because prime cost refers to the sum of direct materials and direct labor only, and does not include factory overhead which is a component of the inventory cost. 93. Kwing Company has 5,000 obsolete desk lamps that are carried in inventory at a manufacturing cost of P50,000. If the lamps are reworked for P20,000, they could be sold for P35,000. Alternatively, the lamps could be sold for P8,000 to a jobber located in a distant city. In a decision model analyzing these alternatives, the sunk cost would be A. P 8,000 C. P20,000 B. P15,000 D. P50,000 (aicpa) 93. D ? The amount of sunk cost in a decision to scrap or rework defective units.  Sunk costs are those incurred in the past and will not change regardless of alternative to be taken. Choice-letter “d” is correct since the cost of manufacturing the obsolete lamps amounting to P50,000 is the sunk cost in this decision. Choiceletter “a” is not the correct answer because it is a differential future cost and is relevant in the decision whether to scrap or rework defective units. Choice-letter “b” is also incorrect because it is the profit from reworking the obsolete units and is relevant in the making of the decision on hand. Choice-letter “c” is also incorrect

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because it is the relevant cost of reworking the obsolete lamps, a future cost and is not a sunk cost. 94. Light Company has 2,000 obsolete light fixtures that are carried in inventory at a manufacturing cost of P30,000. If the fixtures are reworked for P10,000, they could be sold for P18,000. Alternatively, the light fixtures cold be sold for P3,000 to a jobber located in a distant city. In a decision model analyzing these alternatives, the opportunity cost would be A. P 3,000 C. P13,000 B. P10,000 D. P30,000 (aicpa) 94. A ? The opportunity cost in the decision to scrap or rework defective units.  The decision on hand is whether to rework the obsolete light fixtures or sell them as scrap at a given price. If the light fixtures are rework, additional costs shall be incurred which shall be deducted from the incremental sales derived after the rework is done. The relevant analysis shall be as follows: Sales from reworked units P18,000 - Additional cost of reworking (10,000) Income from reworking 8,000 - Income from scrapping 3,000 Net advantage of reworking P 5,000 The alternative that gives the higher profitability shall be taken and in this case is the alternative of reworking. Therefore, the alternative of scrapping should be set aside. This alternative would have possibly provide P3,000 amount of income, however, sacrificed in favor of the reworking alternative. The sacrificed income or benefit in favor of the alternative chosen is the opportunity cost, and in this case amounts to P3,000. 95. A company has 7,000 obsolete toys carried in inventory at manufacturing cost of P6 per unit. If the toys are reworked for P2 per unit they could be sold for P3 per unit. If the toys are scrapped, they could be sold for P1.85 per unit. Which alternative is more desirable (rework or scarp), and what is the total peso amount of the advantage of that alternative? A. Scrap, P5,950. C. Scrap, P47,950. B. Rework, P36,050. D. Rework, P8,050. (cia) 95. A ? The total peso advantage of the desirable alternative.  The desirable alternative shall be the one that gives a higher profit. The alternatives are to rework or scrap the obsolete toys. Reworking needs additional costs (e.g., P2 per unit) to be compared with sales (e.g., P3 per unit) to determine the profit from reworking. The profit per unit of reworking is P1 (i.e., P3 – P2). The net advantage of the desirable alternative is: Income from reworking (7,000 units x P1) P 7,000 - Income from scrapping (7,000 units x P1.85) (12,950) Net advantage of scrapping P( 5,950)

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Indifference point 96. Litton Production, Inc., owns and operates a chain of movie theaters. The theaters in the chain vary from low volume, small town to high volume, Big City/Downtown theaters. Management is considering installing machines that will make popcorn on the premises. This proposed feature would be properly advertised and is intended to increase patronage at the company’s theaters. These machines are available in two different sizes with the following details: Economy Popper Regular Popper Annual capacity 50,000 boxes 120,000 boxes Costs: Annual machine rental P80,000 P110,000 Popcorn cost per box 1.30 1.30 Cost of each box 0.80 0.80 Other variable costs / box 2.20 1.40 The level of output in boxes at which the Economy Popper and the Regular Popper would earn the same profit (loss) is A. 50,000 C. 37,500 B. 65,000 D. 40,000 (rpcpa) 96. C ? The level of output in pesos at which the alternatives would earn the same profit or loss.  The point where there is no difference in profit between alternatives is called the indifference point. The business entertains two machines in making popcorns: the economy popper and the regular popper. The summarized data are given below: Economy Regular Popper (EP) Popper (RP) Fixed costs P80,000 P110,000 Unit variable costs P4.30 P3.50 The indifference point is 37,500 units, computed as follows: Let x = units sold 4.30x = variable cost for EP 3.50x = variable cost for RP By equational presentations, we have: TC (EP) = P80,000 + 4.30x TC (RP) = P110,000 + 3.50x At the point of indifference, we have: TC (EP) = TC (RP) P80,000 + 4.30x = P110,000 + 3.50x 4.30x – 3.50x = P110,000 – P80,000 0.80x = P30,000 x = 37,500 units At 37,500 units sold, the total cost of economy popper and regular popper is the same. At this level, income is also the same assuming they have the same unit sales price. (e.g., the problem does not give the sales price)

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97. Wheels Corp. employees 45 sales personnel to market its sedan cars. The average car sells for P690,000 and a 6% commission is paid to the sales person. It is considering changing the scheme to a commission arrangement that would pay each person a package of P30,000 plus a commission of 2% of the sales made by the person. The amount of total monthly car sales at which Wheels Corp. would be indifferent (answer may be rounded off) as to which plan is selected is A. P45,000,000 C. P33,750,000 B. P36,500,000 D. P22,500,000 (rpcpa) 97. C ? The indifference point where the total payments to sales personnel will be the same.  Indifference point is where the net results between or among alternatives will be the same. The company is entertaining two (2) ways of paying commissions to its sales personnel, (1) a flat commission rate of 6%, or (2) a commission rate of 2% plus a fixed fee of P30,000 per salesperson. The quantitative analysis shall be as follows: If: TS = Total sales And; x = No. of units sold Then; TS = P690,000x C1 = commission based on scheme no.1 C2 = commissions based on scheme no.2 We have: C1 = 6% (P690,000x) = 41,400x C2 = (P30,000 x 45 personnel) + 2% (P690,000x) = P1,350,000 + 13,800x at indifference point: C1 = C2 By substitution, we have: 41,400x = 1,350,000 + 13,800x 41,400x – 13,800x = 1,350,000 27,600x = 1,350,000 x = 1,350,000/27,600 x = 48.913043 Finally: TS = P690,000x = P690,000 (48.913043) = P33.75 M Or: Total sales = P1,350,000 / 4% = P33.75 M At the sales level of P33,750,000, the commission expense of the company will be the same regardless of the commission payment models to be used. 98. Elifer Tools, Inc., uses a semi-automated process in its production. It is faced with a proposal to completely automate its production. Below are data for these alternative method: Complete Semi Automation Automated Material cost per unit P 12.00 P 10.50 Labor cost per unit 3.00 15.00

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Other variable cost per unit Lease cost per year Maintenance cost per year The cost indifference point is A. At 3,300 units. B. At 3,000 units.

4.50 75,000 15,000

431

3.00 30,000 6,000

C. At 6,000 units. D. At 6,300 units.

(rpcpa)

98. C ? The indifference point between installing a complete automation and semiautomation system.  Indifference point is where the net results between or among the alternatives is the same. Applied in business, it is the point where the net profit or where the total costs between or among alternatives is the same. The given data of the problem could be re-tabulated as follows: Complete Sem-i Automation Automated Unit variable cost (12 + P3 + P4.50) P 19.50 (P10.50 + P15 + P3) P 28.50 Total fixed costs (P75,000 + P15,000) P 90,000 (P30,000 + P 6,000) P36,000 Assuming both alternatives have the same unit sales price, then there indifference point is where their total costs are equal. Total costs could be expressed as: Total costs = Fixed costs + Variable Costs or: TC = FXC + VC if: x = units sold then: TC1 = P90,000 + P19.50x (for complete automation) TC2 = P36,000 + P28.50x (for semi-automation) At indifference point: TCI = TC2 P90,000 + P19.50x = P36,000 + P28.50x P90,000 – P36,000 = P28,50x - P19.50x P54,000 = P9.0x x = P54,000/9 x = 6,000 units At 6,000 units sold, the total costs between alternatives is the same at P207,000 [i.e., 90,000 + 19.50 (6,000)] and therefore is at indifference point. 99. Eat N Eat Shop operates sandwiches on the go in shopping malls. The average selling price of a sandwich is P100. And the average cost of each sandwich is P60. A new mall is opening where Eat N Eat wants to locate a shop but the location manager is not sure about the rent method to accept. The mall operator offers two options for shop rentals as follows:

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1. paying a base rent of P40,000 plus 8% of revenue received, or 2. paying a base rent of P20,000 plus 20% of revenue received up to a maximum of P80,000 Eat N Eat will be indifferent between options 1 and 2 when its level of sales is (in thousands) A. P1,000 C. P 900 B. P 750 D. P3,333 (rpcpa) 99. B ? The indifference level in sales between options 1 and 2.  Indifference level is where the result in profit between or among alternatives would be the same. Using the equation method, we may say: Let x = Amount of sales If: Option 1 = P40,000 + .08x Option 2 = P20,000 + P80,000 Then: P40,000 + .08x = P100,000 x = P60,000/.08 x = P750,000 To prove: Option 1 = P40,000 + .08(P750,000) = P100,000 Option 2 = P20,000 + P80,00 = P100,000 Miscellaneous topics 100.These data pertain to Belle Corp.’s Product X Direct labor P32.25 Direct materials 2.50 Fixed manufacturing overhead 5.50 Variable manufacturing overhead 6.00 Variable selling expenses 5.75 Fixed selling expenses 0.80 Variable distribution expense 4.25 Fixed distribution expense 12.10 Total unit cost P99.15 Unit selling price P134.00 Since the plant has excess capacity, production had developed Product Y with the same cost structure as Product X. Marketing believes this new product can be sold for P80.00 per unit. It will be logical for Belle Corp. to do this in the short run: A. Do not market Product Y. because the company will lose. B. Market Product Y if the price can be increased to at least P99.15. C. Produce Product Y and market at P80.00 if the fixed selling and distribution expenses can be eliminated. D. Produce Product Y and market at P80.00 if the fixed selling and distribution expenses cannot be eliminated. (rpcpa) 100.C ? To determine whether a company should market and produce a new product or not.

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 Under the short-term profit analysis, the company should market or produce a new product if its selling price is greater than its unit incremental costs and unit lost contribution margin. The analysis is given below: Unit sales price P 80.00 Unit direct materials (22.50) Unit direct labor (32.25) Unit variable overhead ( 6.00) Unit variable selling expenses ( 5.75) Unit variable distribution expenses ( 4.25) Unit profit margin P 9.25 There is excess capacity to produce the additional units. Expenses are not expected to change. There are no opportunity costs given (e.g., lost profit from regular sales, possible rental income, savings additional production, ROI of increase in investment) and to be considered in the analysis. Hence, choice-letter “c” is correct because at P80 per unit, the company earns at 9.25 per unit. 102.Bolsa Company estimates that 60,000 special zippers will be used in the manufacture of industrial bags during the next year. Sure Zipper Company has quoted a price of P6 per zipper. Bolsa would prefer to purchase 5,000 units per month but Sure is unable to guarantee this delivery schedule. In order to ensure the availability of these zippers, Bosla is considering the purchase of all 60,000 units at the beginning of the year. Assuming that Bolsa can invest cash at 12% the company’s opportunity cost of purchasing the 60,000 units at the beginning of the year is A. P21,600 C. P19,800 B. P43,200 D. P 9,900 102.D ? The opportunity cost of purchasing the 60,000 units at the beginning of the year.  The company has two options of buying the materials (e.g., special zippers): buy all the 60,000 units at the start of the year or buy the zippers in a monthly lot of 5,000 units for 12 months. The materials cost per zipper is P6.00. Buying all the zippers at the beginning of the year means that more cash will be used in inventory operations than if the zippers were bought on a monthly basis and such released cash may be invested to earn 12% return. The opportunity cost of buying the 60,000 units at the beginning of the year is P19,800 as determined below: Average inventory at 60,000 units (60,000/20) 30,000 zippers Less: Average inventory at 5,000 units (5,000/2) 2,500 zippers Excess inventory 27,500 zippers Average excess inventory (27,000 x ½ x P6) x Return on Investment Rate Opportunity costs if the zippers are bought all at the start of the year

P82,500 12% P

9,900

103. American Coat Company estimates that 60,000 special zippers will be used in the manufacture of men’s jackets during the next year. Reese Zipper Company has

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quoted a price of P.60 per zipper. American would prefer to purchase 5,000 units per month, but Reese is unable to guarantee this delivery schedule. To ensure availability of these zippers, American is considering the purchase of all 60,000 units at the beginning of the year. Assuming American can invest cash at 8%, the company’s opportunity cost of purchasing the 60,000 units at the beginning of the year is. A. P1,320 C. P2,640 B. P1,440 D. P2,880 (cma) 103. A ? The opportunity cost of purchasing the 60,000 units at the beginning of the year.  The company has options to buy the 60,000 zippers at the beginning of the year or buy the zippers at 5,000 units per month. If the company decides to purchase 60,000 zippers at the beginning of the year, some of its money would be tied up in inventory and would loose its chance of earning 8% a year. The relevant quantitative analysis is presented as follows: Inventory at the beginning of the year if 60,000 zippers are purchased (60,000 units x P0.60) P36,000 - Inventory at the beginning of the year if zippers are purchased monthly (5,000 units x P0.60) 3,000 Excess inventory at the beginning of the year 33,000 x Average factor ½ Average excess inventory in a year 16,500 x Rate of possible earning 8% Income lost if zippers are purchased all at the beginning of the year (opportunity cost) P 1,320 104.Vince Inc. has developed and patented a new laser disc reading device that will be marketed internationally. Which of the following factors should Vince consider in pricing the device? I. Quality of new device. II. Life of the new device. III. Customer’s relative preference for quality compared with price. A. B.

I and II only. I and III only.

C. II and III only. D. I, II, and III.

(aicpa)

104.D ? Factors that are considered in pricing a device.  Choice-letter “d” is correct that in pricing a device it includes the quality, life and customer’s relative preference for quality compared with price. Aside for those, pricing is also affected by competition, preference over substitute product, costs, place of product and customer, macroeconomic factors, technology, supply and demand level, market control, branding, and goodwill. 105. Briar Co., signed a government construction contract providing for a formula price of actual cost plus 10%. In addition, Briar was to receive one-half of any savings resulting from the formula price’s being less than the target price of P2.2 million.

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Briar’s actual cost incurred were P1,920,000. How much should Briar receive from the contract? A. P2,060,000 C. P2,156,000 B. P2,112,000 D. P2,200,000 (aicpa) 105. C ? The contractor’s amount receive from the contract.  The contractor is to receive formula price plus one-half of savings computed as target price less the formula price. The amount received from the contract is: Formula price (P1,920,000 x 110%) ½ of savings [(P2,200,000 – P2,112,000) x ½] Actual amount received

P2,112,000 44,000 P2,156,000

Questions 106 through 108 are based on the following information. Ignore taxes when answering these questions. ABC company produces and sell a single product called Kleen. Annual production capacity is 100,000 units. It takes 1 machine hour to produce a unit of Kleen, Annual demand for Kleen is expected to remain at 80,000 units, The selling price is excepted to remain at P10 per unit. Cost data for producing and selling Kleen are as follows: Variable cost (per unit) Direct materials P1.50 Direct labor 2.50 Variable overhead 0.80 Variable selling 2.00 Fixed costs (per year) Fixed overhead P100,000,00 Fixed selling and administrative 50,000,00 106.ABC Company has 2,000 units of Kleen that were partially damaged in storage. It can sell these units through regular channels at reduced prices. Sales of these units will not affect regular sales. The relevant unit cost for determining the minimum selling price for these units is A. P6.80 C. P4.00 B. P6.00 D. P2.00 (cia) 106.D ? The relevant unit cost for determining the minimum selling price for damaged units.  The relevant unit cost in determining the minimum selling price for the damaged units is the variable cost which shall be incurred when the units are sold. The production costs, variable or fixed, are sunk costs, already incurred and will not change whether the damaged merchandise is sold or not. Choice-letters “a”, “b”, and “c” are all incorrect because they include production costs which are considered irrelevant in this decision. 107.MNO Company offers to make and ship 25,000 units of Kleen directly to ABC Company’s customers. If ABC Company accepts this offer, it will continue to produce and ship the remaining 55,000 units. ABC’s fixed factory overhead will drop to P90,000. Its fixed selling and administrative expenses will remain unchanged. Variable selling expenses will drop to P0.80 per unit for the 25,000

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units produced and shipped by MNO company. What is the maximum amount per unit that ABC Company should pay MNO Company for producing and shipping the 25,000 units? A. P6.80 C. P5.60 B. P6.40 D. P5.20 (cia) 107.B ? The maximum amount per unit that ABC Company should pay MNO Company for producing and shipping the 25,000 units.  The maximum amount that ABC Company should pay MNO Company for the 25,000 units is the incremental cost of manufacturing the units as follows: Unit variable costs (P1.50 + P2.50 + P0.80) P4.80 Avoidable fixed overhead (P100,000 – P90,000) / 25,000 units] 0.40 Unit variable selling expense (P2.00 – P0.80) 1.20 Incremental cost per unit P6.40 108.ABC Company receives a one-time special order for 5,000 units of Kleen. Acceptance of this order will not affect the regular sales of 80,000 units. Variable selling costs for each of these 5,000 units will be P1.00. What is the differential cost to ABC Company of accepting this special order? A. P39,000 C. P30,250 B. P34,000 D. P29,000 (cia) 108.D ? The differential cost of accepting a special order for 5,000 units.  Differential cost (or incremental costs) are those that change from an alternative to another. In accepting the special order, the variable production cost of 4.80 (i.e., P1.50 + P2.50 + P0.90) and unit variable expense of P1.00 will be incurred. The total differential costs shall be: Variable production costs (5,000 units x P4.80) P24,000 Variable selling costs (5,000 x P1.00) 5,000 Total differential cost of accepting the special order P29,000 109.CGW Corporation sells product T at a unit price of P5 deriving annual gross sales of P50,000. The variable cost to produce T is P4.50 per unit and total fixed costs is P10,000. If CGW increases T’s unit price to P8 a decrease of sales to only 4,000 units would result. The effect of the price increase on CWG’s net income from the sales of product T will be a: A. 9,000 increase. C P4,000 increase. B. P18,000 decrease. D. No effect. (rpcpa) 109.A ? The effect of the price increase on net income from the sales of product T.  If the unit sales price of product T is increased from P5 to P8, the quantity sold is reduced from 10,000 units to 4,000 units. The original unit contribution margin is P0.50 (i.e., P5.00 – P5.40). The effects on net income would be as follows:

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Increase in USP (P3 x 4,000 units) Decrease in volume (P0.50 x 6,000 units) Net increase in profit

437

P12,000 (3,000) P 9,000

Questions 110 through 112 are based on the following information. Camiling Ski Company recently expanded its manufacturing capacity, which will allow it to produce up to 15,000 pairs of cross-country skis of the mountaineering model or the touring model. The Sales Department assures management that it can sell between 9,000 pairs and 13,000 pairs of either product this year. Because the models are very similar, Camiling Ski will produce only one of the two models. The following information was compiled by the Accounting Department. Per-Unit (Pair) Data Mountaineering Touring Selling price P 88.00 P 80.00 Variable costs 52.80 52.80 Fixed costs will total P369,600 if the mountaineering model is produced but will be only P316,800 if the touring model is produced. Camiling Ski is subject to a 40% income tax rate. 110.The total sales revenue at which Camiling Ski Company would make the same profit or loss regardless of the ski model it decided to produce. A. P880,000 C. P924,000 B. P422,400 D. P686,400 110.A ? The total sales revenue at which Camiling Ski Company would make the same profit or loss regardless of the ski model it decided to produce.  Profit equals contribution margin less fixed costs. The units to be sold for Touring Model would be 110% (i.e., 88/80) that of Mountaineering Model. The profit expressions for the two models to arrive at the same total revenue would be as follows: P = CM - FC If

:

Then

:

If

:

m = mountaineering t = touring P(m) = (P88 – P52.80) x – P369,600 P(t) = (P80 – P52.80) 1.1x – P316,800 P(t) = P(m)

Then: P35.20x – P369,600 5.28x x 1.1x To check: Sales (t) Sales (m)

= = = = = =

(P27.20) 1.1x – P316,800 P52,800 10,000 (Mountaineering) 11,000 (Touring) 11,000 x P80 = P880,000 10,000 x P88 = P880,000

ALTERNATIVELY: If : x = Sales in pesos P = CM – FC And : P(m) = 0.40x – P369,600 P(t) = 0.34x – P316,800

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Then

Short-term non-routine decisions

:

438

0.40x – P369,600 = 0.34x – P316,800 X = P880,000

111.If the Camiling Ski Company sales department could guarantee the annual sale of 12,000 pairs of either model, Camiling Ski would A. Produce 12,000 pairs of touring skis because they have a lower fixed cost. B. Be indifferent as to which model is sold because each model has the same variable cost per unit. C. Produce 12,000 pairs of mountaineering skis because they have a lower breakeven point. D. Produce 12,000 pairs of mountaineering skis because they are more profitable. 111.D ? The option to be undertaken if the sales department could guarantee a sales of 12,000 units for either model.  The option to be undertaken shall be the one that gives the higher increment in profit which is measured by the increase in contribution margin. In short, whichever model has a higher unit contribution margin shall be prioritized. In this case, mountaineering model shall be produced because its unit contribution margin (i.e., P35.30) is higher than touring model of P27.20. 112.If Camiling Ski Company desires an after-tax net income of P24,000, how many pairs of touring model skis will the company have to sell? A. 13,118 pairs C. 13,853 pairs B. 12,529 pairs D. 4,460 pairs 112.A ? The number of pairs of touring model to sell if a net income is P24,000.  The number of units to sell with profit shall be: Sales (units) = (FC + IBIT) / UCM = [P316,800 + (P24,000 / 60%] / P27.20 = 13,118 units 113.Data covering QMB Corporation’s two product lines are as follows: Product “W” Product “Z” Sales P36,000 P25,200 Income before income tax 15,936 (8,388) Sales price per unit 30.00 14.00 Variable cost per unit 8.50 15.00 The total units sold of “W” was 2,400 and that “Z” was 3,600 units. If product “Z” is discontinued and this results in a 400 units decrease in sales of Product “W”, the total effect on income will be: A. P13,600 decrease. C. P8,600 decrease. B. No effect. D. P5,000 decrease. (rpcpa) 113.D ? The effect to income if product Z is discontinued.  The focus in deciding whether to drop or continue a segment (i.e., product, department or process) is in the segment margin (or departmental margin).

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Normally, if the direct margin is positive, the segment has to be continued because discontinuance of the segment would mean elimination of the its positive segment margin and a decrease in the overall profit of the business. Segment margin is the difference between contribution margin and direct fixed costs and expenses. The UCM of the products are as follows: Product W Product Z Unit sales price P30.00 P14.00 Unit variable costs P(8.50) (15.00) Unit contribution margin P21.50 P(1.00) Product Z is a candidate for elimination because it has a negative UCM. Additionally, we have to consider that dropping product Z would mean a loss of 400 units in the sales of product W. The analysis is presented below: Effects to profit Elimination of negative CM- product Z (3,600 units x P1,000) P3,600.00 Lost CM – product W (400 x P21.50) (8,600.00) Net decrease in profit P(5,000.00) 114.KXM Bottling Corporation makes and sells two softdrinks COLA and ORANGE. The comparative data for the two shows: Cola Orange Selling price, per bottle P9.50 P9.80 Variable cost 6.50 7.20 Production capacity per hour 250 bottles 300 bottles There are 500 available production hours per month. Based on the above information A. Orange and Cola unit contribution margin is the same hence, it is equally profitable to produce either. B. It is more profitable to produce Orange. C. Cola’s contribution margin is higher than that of Orange hence more profitable to produce. D. It is more profitable to produce Cola. (rpcpa) 114.B ? The product that is more profitable.  The comparative profitability of products shall be based on their contribution margin on limited resource. The limited resource here is the production hours and their respective contribution per hour is as follows: Cola = (P9.50 – P6.50) x 250 bottles = P750 per hour Orange = (9.80 – P7.20) x 300 bottles = P780 per hour Choice-letter “b” is correct, it is more profitable to produce product orange. 115.LXQ Turo-Turo Stores are open for 15 hours a day (from 6:00 A.M to 9:00 P.M. It sells package meals at a price of P40 per meal. Variable cost per meal is P30 while total fixed costs for operation of all the stores amounted to P200,000 monthly. It is thinking to reduce its store hours to only 12 hours a day as this would reduce fixed costs (utilities and wages) by P60,000 a month. It is expected that the reduced

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store hours would result in a loss of 1,500 packed meals in monthly sales. The reduction in store hours would result in: A. A prospective increase in monthly operating income of P45,000. B. A prospective decrease in monthly operating income. C. A prospective increase in monthly operating income of P60,000. D. No change in monthly operating income. (rpcpa) 115.A ? The effect to operating income if the store hours are reduced from 15 to 12 hours a day.  Reducing the store hours would have twin effects of reducing the number of amounts sold and reducing the fixed costs, as follows: Effect in profit Decrease in fixed cost P60,000 Lost contribution margin (1,500 x P10) (15,000) Net increase in profit P45,000 The unit contribution margin is P 10 (i.e., P 40 – P 30). 116.QXY Computers Inc. has unutilized plant capacity which it could use to produce a low-margin item. It should produce the low-margin item if the same can be sold for more than its A. Indirect costs plus fixed cost. B. Variable costs plus any opportunity cost of the unutilized plant capacity. E. Fixed costs plus variable cost. D. Variable cost. (rpcpa) 116.B ? The point when a low-margin item is produced in a plant with unused capacity.  Since the plan has unutilized capacity, there will be no lost contribution margin from regular sales and fixed cost is expected to remain the same. Ergo, a product (whether low-margin or high-margin) is to be produced using the unutilized capacity if such product can be sold higher than its incremental cost (variable costs and variable expenses) plus any opportunity cost of the unutilized plant capacity. Choice-letters “a” and “c” are incorrect because they include fixed cost; while choice-letter “d” is incorrect because it disregards possible opportunity costs of the unutilized plant capacity.

 done 